Depreciation is the method you use to claim expenses for items that cost more than $100. The rules of depreciation are complicated and I've written previous articles about these rules - here.
What happens after the first year you begin depreciating an item?
After the first year, calculate your depreciation deductions on a separate piece of paper for each item you are depreciating. Add up the total amount of depreciation you are entitled to claim, and enter the result on IRS Form 4562 Depreciation and Amortization, line 17. Do not send in your worksheets to show how you arrived at your number.
If the item wears out before the end of the depreciation period, claim all the remaining depreciation in the year it wore out. For example, let's say you bought a used desk in 2011 for $300. Your Time-Space Percentage was 40%. The business portion you can depreciate is $120 ($300 x 40% = $120). Office equipment gets depreciated over 5 years (see note at end). Using the 200% declining balance method of depreciation, you were entitled to claim $24 (20% of $120) on your 2011 tax return. If the desk was damaged in 2012 and you threw it away, you can claim the remaining $96 ($120 - $24 = $96) on your Form 4562 in 2012.
If you went out of business before the end of the depreciation period, you stop claiming depreciation in the year you went out of business. So, if you went out of business in 2013, you claimed 3 years of depreciation on the desk, but you do not get to depreciate the remaining two years of depreciation.
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