Tax Tip of the Week: Depreciation & Depletion

Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It’s an annual allowance for the wear and tear, deterioration, or obsolescence of the property. Depreciation begins when a taxpayer places property in service for use in a trade or business or for the production of income. The property cease to be depreciable when the taxpayer has fully recovered the property’s cost or other basis or if they retire. Most types of tangible property, except land, is depreciable, including intangible property like patents, copyrights, and computer software. In order for depreciation to be allowed, the property must meet the following requirements:
• Taxpayer must own the property
• Property must be used for business or an income producing activity
• Property must have determinable useful life of more than one year

Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. A depletion deduction allows an owner to account for the reduction of a product’s reserves. Those with an economic interest in mineral property or standing timber, you can take a deduction for depletion. Those who claim depletion may be liable for alternative minimum tax also.