Partially Depreciable Assets

What if, for a single purchase price, you purchase an asset that is only partly depreciable? Before you can determine the depreciable tax basis of the asset, what you need to do is to allocate the price between the depreciable part and the nondepreciable part.



In this example, the $70,000 paid for the building could be recovered through depreciation, while the $30,000 paid for the land could not, because land is not depreciable. But wouldn't it be better to allocate as much as possible to the building (say, $90,000), so Ray's depreciation deductions would be larger and his tax bill would be lower?

Absolutely, but you can expect the IRS to attack your allocation if it doesn't reflect economic reality.



Mixed-use property. You also need to make an allocation if you have a single asset that is used partly for business and partly for personal purposes; for example, if you have a home office, or a car that you use sometimes for work and sometimes for family driving.

You will need to allocate the cost of the asset according to the percentage of usage that is strictly for business. For example, if 20 percent of the square footage of your home is used as an office, you may be able to depreciate 20 percent of the cost of the home; if 60 percent of the mileage you drive in your car is for business purposes, you may be able to depreciate 60 percent of the cost of the car.



Although you don't qualify for the home office deduction, you have a computer at home on which you keep a backup copy of your accounting records, and which you use for other business purposes in the evenings. You also use the computer to keep track of your investments, surf the Internet, send and receive social E-mail, etc.

Your computer time log shows that you've spent approximately 10 hours per week on the computer for business reasons, and approximately 5 hours per week for other purposes. Therefore, you can depreciate 2/3 of the cost of the computer.