Depreciation is an accounting concept that businesses use to spread the cost of a piece of property over a period of time. The purpose is to allow businesses to take an annual deduction for the wear and tear of an asset. The Internal Revenue Service offers guidelines on what can be depreciated, as well as the methodologies and estimated lives. A horse trailer can be depreciated for federal income tax purposes if it is used in an income-producing activity. It is important to note that a horse trailer used for personal activities cannot be depreciated on a federal income tax return.
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The depreciable basis of an asset is the total amount of capital that is deducted annually over the life of the asset. Usually, this is simply the purchase price of the horse trailer. However, special circumstances such as converting the horse trailer from personal use or receiving it as a result of a barter transaction will adjust the basis. If the trailer is converted from personal to business use, the basis will be the fair market value at the time of conversion. If you traded something for the trailer, such as a horse worth $7,000, then the basis will become the fair market value of the traded property, in this case $7,000.
Federal Depreciation Methods
If your business uses a horse trailer in its operations, the IRS allows you to depreciate the basis of that trailer over a five-year period. The two different methods for calculating this depreciation are the 150 percent declining balance method and the straight line method. The 150 percent declining balance method is an accelerated depreciation method that allows a larger deduction in the earlier years of the asset. The straight line method spreads the cost evenly over the life of the asset, and is the most commonly used method due to its simplicity. For example, the annual depreciation deduction for a $10,000 horse trailer will be $2,000 ($10,000 / 5 years = $2,000/year).
Section 179 Depreciation Election
Section 179 of the IRS tax code allows taxpayers to expense the entire purchase of an asset in the current year, as opposed to depreciating the cost over its useful life. This deduction can be taken only on assets used more than 50 percent for business. The amount of the deduction is limited to the lesser of taxable income earned by the business or $500,000 for the 2010 tax year.
Deduction Location on Your Federal Return
The federal tax deduction for depreciation, regardless of the methodology chosen, will be take on Form 4562. If you operate your business as a sole proprietorship, the depreciation expense calculated on Form 4562 will carry over to Line 13 on the 2010 Schedule C. If your business is organized as a separate entity, the depreciation expense will still be carried over from Form 4562 to the appropriate line item on the business tax return.