You generally cannot deduct, in one year, the entire cost of property you purchased, either for use in your trade or business or to produce income, if the property has a useful life substantially beyond the tax year. Instead, you can depreciate it. That is, you can spread the cost over a number of years, and deduct a part of the cost 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. If you use property, such as a car, for both business or investment and personal purposes, only the business or investment use portion may be depreciated. You may depreciate property that meets all five of the following tests:

• It must be property you own,
• It must be used in a business or other income–producing activity,
• It must have a determinable useful life,
• It must be expected to last more than one year; and
• It must not be excepted property. Excepted property includes certain intangible property and term interests and property placed in service and disposed of in the same year.

Generally, if you are depreciating property you placed in service after 1980 and before 1987, you must use the Accelerated Cost Recovery System (ACRS). For property placed in service after 1986, you generally must use the Modified Accelerated Cost Recovery System (MACRS). For property placed in service before 1981, you must continue to use the same method you have used in the past.

If you meet eligibility requirements, you can choose to deduct a limited amount (up to $24,000 for 2002, and $25,000 for 2003) of the cost of qualifying property in the year you buy it for use in your business. This deduction is known as the "Section 179 deduction."

If you qualify, you may take an increased depreciation deduction under the New York Liberty Zone provisions.

For more information, refer to Publication 946 (PDF), How to Depreciate Property, or Publication 534 (PDF), Depreciating Property Placed in Service Before 1987. You can also find information on depreciation in Publication 527 (PDF), Residential Rental Property (Including Rental of Vacation Homes), Publication 463 (PDF), Travel, Entertainment, Gift, and Car Expenses, Publication 587 (PDF), Business Use of Your Home, Publication 225 (PDF), Farmer's Tax Guide, and Publication 3991, Highlights of the Job Creation and Worker Assistance Act of 2002.

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