How Does Property Depreciate in a Small Business or S-Corp?

How Does Property Depreciate in a Small Business or S-Corp?

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The IRS allows small businesses and s-corps to get back some of the cost or other basis of certain property that they use in their business through a method called depreciation, which is an annual tax deduction. 

Have a small business, but haven’t made the s-corp election? Check out What is an S Corporation for more info and to start saving more on taxes!

When it comes to taxes, depreciation and deductions for s-corps and small businesses, you want to be certain you’re saving the most money and time possible. And that means having s-corp accountants and bookkeepers on your side. Get in touch with our team for all things s-corp. 

What Property Can an S-Corp Depreciate?

Small businesses can depreciate almost anything that is used for the business (machinery, equipment, buildings, vehicles, furniture etc.), but they cannot cannot claim depreciation on personal property.

What about if you use something for business AND personal use, like a car? 

In that case, you can only depreciate the portion or percentage of use that is for the business. Also, land is never depreciable, although buildings and certain land improvements may be.

How to Know if Your S-Corp Can Use Depreciation?

The IRS lays out pretty clear requirements for small businesses to be eligible to depreciate certain property. 

  • Own the property. The business has to own the property (it’s considered to own the property even if it is subject to a debt).
  • Use the property in a business or income-producing activity. If the property is used to produce income, the income must be taxable. Property that’s used solely for personal activities can’t be depreciated.
  • Be able to assign a determinable useful life to the property. This means that it must be something that wears out, decays, gets used up, becomes obsolete or loses its value from natural causes.
  • Expect the property to last more than one year. It must have a useful life that extends substantially beyond the year a business places it in service.
  • Not depreciate excepted property. The business can’t depreciate anything that is “excepted” from depreciation, which are some of the things we already mention (certain intangible property, certain term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same year). 

How Long Does a Small Business’s Property Depreciate?

How long the depreciation term is depends on the type of property. The IRS gives different classes of property, and those classes determine how long the property depreciates. 

Check out the classes in the table below, and feel free to download our PDF Depreciation Table

For most s-corp and small business owners, the majority of property is going to fall into the first three categories in the table below. 

Class Depreciation PeriodDescription
3-Year  Property3 yearsTractor units for over-the-road use Race horses over 2 years old when placed in service, any other horse over 12 years old when placed in service Qualified rent-to-own property
5-Year  Property5 yearsAutomobiles, taxis, buses, trucks Any qualified technological equipment (computers etc.) Office machinery (such as typewriters, calculators, and copiers) Any property used in research and experimentation Breeding cattle and dairy cattle Appliances, carpets, furniture, etc., used in a residential rental real estate activity Certain geothermal, solar, and wind energy property Certain farming business machinery equipment
7-Year  Property7 yearsOffice furniture and fixtures (such as desks, files, and safes) Certain agricultural machinery and equipment  Certain motorsports entertainment complex property Railroad track Any natural gas gathering line placed in service after April 11, 2005 Any property that does not have a class life and has not been designated in any other class
10-Year Property10 yearsVessels, barges, tugs, and similar water transportation equipment Any single-purpose agricultural or horticultural structure Any tree or vine bearing fruits or nuts Qualified small electric meter and qualified smart electric grid system
15-Year Property15 yearsCertain land improvements (shrubbery, fences, roads, sidewalks and bridges etc.) Retail motor fuels outlet (convenience store etc.)  Municipal wastewater treatment plants  Initial clearing and grading land improvements for gas utility property Electric transmission property  Natural gas distribution lines Telephone distribution plant and comparable equipment  Qualified improvement property
20-Year Property20 yearsFarm buildings (other than those noted under 10-year property) Municipal sewers not categorized as 25-year property The initial clearing and grading of land for electric utility transmission and distribution plants
25-Year Property25 yearsProperty that is an integral part of the water distribution facilities municipal sewers
Residential Rental Property27.5 yearsAny building or structure where 80% or more of its gross rental income is from dwelling units (rental home, mobile homes etc. – does not include units in an establishment where more than half the units are used on a transient basis such as in a hotel)
Nonresidential Real Property39 yearsAn office building, store, or warehouse that is neither residential rental property nor property with a class life of less than 27.5 years

Hopefully you’ve got the lay of the land on depreciation now, but remember, understanding it and actually making sure you’re taking advantage of depreciation in your s-corp are two different ball games. Give our s-corp accountants a call!