Page 35 - Tax Guide for Small Business

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What property can be depreciated? You can depreci- Your section 179 election for the cost of any sport
ate property if it meets all the following requirements. ! utility vehicle (SUV) and certain other vehicles is
limited to $25,500. For more information, see the
• It must be property you own. Instructions for Form 4562 or Pub. 946.
CAUTION
• It must be used in business or held to produce in-
come. You never can depreciate inventory (explained Listed property. You must follow special rules and re-
in chapter 2) because it is not held for use in your cordkeeping requirements when depreciating listed prop-
business. erty. Listed property includes any of the following.
• It must have a useful life that extends substantially be- • Most passenger automobiles.
yond the year it is placed in service.
• It must have a determinable useful life, which means • Most other property used for transportation.
that it must be something that wears out, decays, gets • Any property of a type generally used for entertain-
used up, becomes obsolete, or loses its value from ment, recreation, or amusement.
natural causes. You never can depreciate the cost of For more information about listed property, see Pub.
land because land does not wear out, become obso- 946.
lete, or get used up.
• It must not be excepted property. This includes prop- Form 4562. Use Form 4562, Depreciation and Amortiza-
tion, if you are claiming any of the following.
erty placed in service and disposed of in the same
year. • Depreciation on property placed in service during the
current tax year.
Repairs. In general, you do not depreciate the costs of
repairs or maintenance if they do not improve your prop- • A section 179 deduction.
erty. Instead, you deduct these amounts on line 21 of • Depreciation on any listed property (regardless of
Schedule C. Improvements are amounts paid for better- when it was placed in service).
ments to your property, restorations of your property, or
work that adapts your property to a new or different use.
Election to capitalize repair and maintenance Employees' Pay
costs that do not improve your property. You can You generally can deduct on Schedule C the pay you give
make an election to treat certain repairs or replacements your employees for the services they perform for your
in your trade or business as improvements subject to de- business. The pay may be in cash, property, or services.
preciation. This election is available if you treat these
amounts as capital expenditures on your books and re- To be deductible, your employees' pay must be an ordi-
cords regularly used in computing your income and ex- nary and necessary expense and you must pay or incur it
pense. The election to capitalize repair and maintenance in the tax year. In addition, the pay must meet both the fol-
costs is discussed in chapter 1 of Pub. 535. lowing tests.
Depreciation method. The method for depreciating • The pay must be reasonable.
most business and investment property placed in service • The pay must be for services performed.
after 1986 is called the Modified Accelerated Cost Recov-
ery System (MACRS). MACRS is discussed in detail in Chapter 2 in Pub. 535 explains and defines these require-
Pub. 946. ments.

Section 179 deduction. You can elect to deduct a limi- You cannot deduct your own salary or any personal
ted amount of the cost of certain depreciable property in withdrawals you make from your business. As a sole pro-
the year you place the property in service. This deduction prietor, you are not an employee of the business.
is known as the “section 179 deduction.” The maximum Kinds of pay. Some of the ways you may provide pay to
amount you can elect to deduct during 2019 generally is your employees are listed below. For an explanation of
$1,020,000 (higher limits apply to certain property). each of these items, see chapter 2 in Pub. 535.
This limit generally is reduced by the amount by which
the cost of the property placed in service during the tax • Awards.
year exceeds $2,550,000. The total amount of deprecia- • Bonuses.
tion (including the section 179 deduction) you can take for
a passenger automobile you use in your business and first • Education expenses.
place in service in 2019 is $10,100 ($18,100 if you take • Fringe benefits (discussed later).
the special depreciation allowance for qualified passenger
automobiles placed in service in 2019). Special rules ap- • Loans or advances you do not expect the employee to
ply to trucks and vans. For more information, see Pub. repay if they are for personal services actually per-
946. It explains what property qualifies for the deduction, formed.
what limits apply to the deduction, and when and how to • Property you transfer to an employee as payment for
recapture the deduction. services.

Chapter 8 Business Expenses Page 33