Depreciable Value of an Asset
The starting point to determine how much depreciation you can claim on a business asset is a value for the asset known as its "tax basis."
Usually, the tax basis is equal to the asset's purchase price, minus any discounts and plus any sales taxes, delivery charges, and installation fees.
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If you bought a piece of machinery priced at $1,000, you paid eight percent in sales tax, and it cost $200 to deliver the item, the tax basis would be $1,280 and that's the maximum amount that you could claim as depreciation over the life of the asset.
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For real estate, you can also include costs of legal and accounting fees, revenue stamps, recording fees, title abstracts/insurance, surveys, and real estate taxes assumed for the seller. Some special rules apply to trade-ins of business equipment.
If you acquire property by gift, the tax basis for depreciation will be the same as the donor's basis at the time of the gift.
If you convert personal property to business use, the basis will be the lower of (a) the fair market value at the time of the conversion, or (b) the cost plus any additions or improvements, and minus any deducted casualty losses, up to the time of the conversion.
Things aren't always so simple. You may need to make some adjustments, under a number of different circumstances:
- Partially depreciable assets - if you purchase a group of assets at the same time, or if a particular asset is used partly for business and partly for personal purposes, part of your acquisition costs might not be depreciable, or might be depreciated at different rates.
- Adjustments over time - during the period you use the asset, you may have to adjust for depreciation claimed, additions or improvements, or losses to the asset.
- Trade-ins - if you receive an asset in exchange for another, the basis of the new asset is related to the adjusted basis of the old asset.
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