You generally cannot deduct, in one year, the entire cost of property you purchased, either to use in your trade or business or to produce income, if the property has a useful life of more than one year. Instead, you can depreciate it. That is, you can spread the cost over a number of years, and deduct only a part of it each year.

The kinds of property that you can depreciate include machinery, equipment, buildings, vehicles, and furniture. You cannot claim depreciation on property held for personal purposes, such as your home or car. If you use property, such as a car, for both business and personal purposes, only the business use portion may be depreciated. You may depreciate property if it meets all three tests:

1. It must be used in business or other income-producing activity,
2. It must be something that wears out, decays, gets used up, becomes obsolete, or loses value from natural causes; and
3. It must have a useful life that you can determine, and the useful life must be longer than one year.

Generally, if you are depreciating property you placed in service after 1980 and before 1987, you must use the Accelerated Cost Recovery System known as ACRS -- pronounced "acres". For property placed in service after 1986, you generally must use the Modified Accelerated Cost Recovery System known as MACRS --pronounced "makers", the required method for depreciating most tangible property. For property placed in service before 1981, you must continue to use the same method you have used in the past.

For more information, order Publication 946, How to Depreciate Property, or Publication 534, Depreciating Property Placed in Service Before 1987. You can also find information on depreciation in Publication 527, Residential Rental Property (Including Rental of Vacation Homes), and Publication 463, Travel, Entertainment, Gift, and Car Expenses. All publications may be ordered by calling 1-800-829-3676, and many may be downloaded from this web site.

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