Depreciable basis is the amount of an asset’s tax basis that depreciation is actually computed on, after the parts that cannot be depreciated have been taken out. It starts at cost, is cut for any non-business use and for any land in the purchase, and is then reduced year by year as deductions are taken against it.
depreciable basis = cost or other basis
- the land component
x business-use percentage
- any first-year expensing or bonus takenWhere the Starting Number Comes From
The general rule is one line. The basis of property is the cost of such property, except as the Code otherwise provides (26 U.S.C. 1012).
Cost means more than the invoice. It generally carries the amounts a buyer had to spend to get the asset in place and working, so sales tax, freight, installation, testing and the legal and recording fees of acquiring it usually belong in the number rather than in current expense.
The exceptions in that “except as otherwise provided” clause are where basis stops being cost. Property received by gift, inherited property, property acquired in a like-kind exchange and property contributed to an entity all take a basis set by their own rules, and inherited property in particular is covered in step-up basis.
What Comes Out Before Depreciation Starts
Two subtractions happen before the first year’s deduction is computed, and both are easy to skip.
Land is the first. The deduction is a reasonable allowance for the exhaustion, wear and tear, including a reasonable allowance for obsolescence, of property used in the trade or business or of property held for the production of income (26 U.S.C. 167(a)). Land does not exhaust or wear out, so the land portion of a real property purchase never enters depreciable basis at all. How a lump-sum price is split between land and building, and what land preparation does to the answer, are set out in can you depreciate land.
Personal use is the second. Where an asset is used partly in the business and partly by its owner, only the business share of basis is depreciable, and the percentage has to be supported rather than assumed. A change in that percentage in a later year changes the deduction from that year forward.
The Rule That Reduces Basis Whether You Claimed It or Not
This is the part that costs clients money, and it is written into the adjustment rule rather than into any depreciation section.
Basis is adjusted for exhaustion, wear and tear, obsolescence, amortization and depletion, to the extent of the amount allowed as deductions in computing taxable income and resulting in a reduction of tax, but not less than the amount allowable under the same laws (26 U.S.C. 1016(a)(2)).
Read the last clause slowly. Basis comes down by at least what could have been deducted, whether or not anybody deducted it. A client who never depreciated a rental property still has a reduced basis when it sells, so the depreciation was lost and the gain arrives anyway. The statute adds that where no method has been adopted under the depreciation section, the amount allowable is computed under the straight line method (26 U.S.C. 1016(a)(2)).
That is also why the fix for missed depreciation is a method-change filing rather than an amended return in most cases, and why finding an asset that was never set up is worth raising in the year it is found rather than at sale.
Expensing Comes Off the Basis, Not Off the Deduction
First-year expensing and bonus depreciation are not extra deductions layered on top. They consume basis, and only what survives them is depreciated over the recovery period.
The order matters and it is fixed: first-year expensing is applied first, then bonus depreciation on what remains, and the remainder is what the recovery method runs against. A client who takes a large first-year deduction and then expects a full schedule of later deductions on the same asset is double counting the same dollars. The mechanics of each are in bonus depreciation, and the recovery periods and conventions that run against whatever is left are in MACRS.
Common Questions
No, though they move together. Adjusted basis is the figure a disposition is measured against, and how it is assembled is set out in realized gains. Depreciable basis is the narrower amount depreciation is computed on, so it excludes the land and the personal-use share that adjusted basis still carries. On a building bought with land, the two are never equal.
An improvement is generally treated as a separate asset with its own basis and its own recovery period rather than as an addition to the original one, so the answer is usually no for the original asset and yes for the new one. Repairs are a different question entirely, since a deductible repair never becomes basis at all.
The deduction is recomputed on the lower business percentage going forward. Where use falls below the level a favorable method required, prior deductions can also be recaptured, which is the mechanism depreciation recapture works through. Neither result restores basis that has already come off.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a real block of its own fixed asset and depreciation work through a trial task before anything client facing depends on it.
