How do I determine the useful life of a business asset?
Use these three major factors to figure your useful-life depreciation deduction:
- Basis of the property to be depreciated -- This is usually the cost of the equipment.
- Salvage value -- This is the residual value the equipment is estimated to have when you retire it.
- Depreciation period -- This is the time period when you claim the deductions. To figure your depreciation period, choose between these two systems:
- Useful life system -- The depreciation period is the actual life of the equipment for you. This is based on your own use of the equipment and your facts and circumstances.
- Class-life asset-depreciation range system -- You choose a depreciation period from a set of ranges. The IRS creates the ranges for various classes of depreciable assets. The period for each class shows the item’s useful life for that particular industry.
To find out which depreciation class to use, see Publication 946: How to Depreciate Property. If a certain class isn't available, the item is usually considered seven-year property.