Depreciation

[Questionguy101]

A business started and ended in the same tax year. How is the depreciation expense of the depreciation assets supposed to be calculated. Can the owner deduct the full amount of everything in this year, even the leasehold improvement? The business was not sold.

[Bees Knees]

Depreciation is not allowed if the asset is placed in service and disposed of in the same taxable year. Therefore, it depends on what happened to the assets after the business ended.

For example, if the owner of the business took the computer home with him and is now using it for personal purposes, no deduction is allowed as the asset was converted to personal use prior to any allowance for depreciation.

If the owner spent money on leasehold improvements, and those improvements are now gone because the owner lost the lease (and thus lost the asset), the asset is treated as being disposed of for zero money. The loss on the asset would be deductible as an ordinary loss on Form 4797.

If the owner took some of the assets home that were placed in service, and now those assets are currently being stored for future use in another business, those assets are considered idle and depreciation should continue to be taken.

You never write off the remaining basis in an asset simply because the business stopped. If the asset is permanently taken out of service, depreciation stops and the remaining un-depreciated basis continues to be the basis in that asset. If the asset is eventually sold or trashed, gain or loss is calculated using the remaining basis of the asset.