Help! Questions on correctly computing depreciation for business property (MACRS & bonus depreciation)

I'm really confused about how to handle some depreciation calculations for my business property and could use some advice from others who've dealt with this. For my first question - in 2021 I purchased some office equipment (not listed property) that I put into service in August 2021. I took 100% bonus depreciation, but since my business use was about 95%, the bonus depreciation was prorated. This left me with around $135 of residual basis. My tax software gave me a 5-year MACRS depreciation schedule for that remaining $135, but weirdly it didn't start taking the depreciation on my 2021 return. Should I start taking it on my 2023 return? And if so, do I use the Year 1 amount or the Year 2 amount from the schedule? (This matters because usually you'd start depreciation in the year the property was placed in service, which was 2021!) Second question - my business use percentage for property changes every year (might be 95% one year, 92% the next). I've been calculating the depreciation schedule from the remaining basis after bonus depreciation assuming 100% business use. Then each year, I prorate that year's amount by the actual business use percentage. Is this the right approach? At the end of the schedule, there will still be some basis left due to the <100% business use - what happens to that leftover amount? Finally - most of my depreciation deductions aren't currently allowed because of passive activity loss limits based on my income level. When I eventually sell the property and deal with depreciation recapture, am I right in thinking that disallowed depreciation doesn't actually reduce my basis? In other words, I won't get penalized for depreciation I couldn't take? Thanks for any help understanding this complicated stuff!

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20 comments

Carmen Flores

•8M

Your depreciation questions touch on some common areas of confusion. Let me walk through these for you: For question 1, since you already established a depreciation schedule in 2021, you should continue with that schedule using the Year 2 amount for 2022, Year 3 amount for 2023, and so on. The fact that no actual depreciation was taken in 2021 despite creating the schedule is a bit odd, but this could be due to other factors like passive activity limitations. The important thing is to continue the schedule as established. For your second question, your approach is correct. You calculate the full depreciation schedule based on the remaining basis after bonus depreciation, then multiply each year's amount by that year's business use percentage. The leftover basis at the end is simply not depreciated - it remains part of your adjusted basis in the property when you dispose of it. Regarding your third question, you're absolutely right. Depreciation that was calculated but disallowed due to passive activity loss limitations doesn't reduce your basis. When you eventually dispose of the property, your basis won't be reduced by depreciation you weren't able to deduct. This is actually beneficial since it means less gain (or more loss) when you sell. Hope this helps clear things up!

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Andre Dubois

•8M

Thanks for the explanation, but I'm still confused about question 1. If the depreciation schedule was created in 2021 but no depreciation was actually taken that year, doesn't that mean I basically "missed" Year 1? Should I just skip Year 1 of the schedule entirely and start with Year 2 for 2022? Or should I somehow combine Years 1 and 2 for my 2022 return? Also, for question 3, are you saying that only depreciation I actually got to deduct affects my basis, not what was calculated but disallowed?

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Carmen Flores

•8M

For question 1, you don't combine or skip. Even though no depreciation was taken in 2021, the schedule is still set. So for 2022, you use the Year 2 amount. Think of it this way - the schedule is based on when the asset was placed in service, regardless of when you actually get to take the deduction. Regarding question 3, exactly right. Your basis is only reduced by depreciation that you actually deducted on your return. If depreciation was calculated but disallowed (suspended) due to passive activity limitations, it doesn't reduce your basis until the year when those suspended losses become deductible.

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CyberSamurai

•8M

When I was struggling with similar depreciation issues for my rental properties last year, I found this amazing service called taxr.ai (https://taxr.ai) that completely saved me. Their system analyzed my past returns and property documentation, then gave me a detailed breakdown of exactly how my depreciation should be calculated correctly. It actually found that my previous tax preparer had been applying the wrong recovery period for some building components, which could have caused issues if I was audited. Plus, they showed me how to properly document my business use percentages which sounds like would help with your second question. The report it generated even had specific line items for handling partially-depreciable assets like yours.

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CyberSamurai

•8M

You upload your previous tax returns and any supporting documentation you have for the assets you're depreciating. They use some kind of AI to analyze the documents and identify the right depreciation method for each asset. Their security seemed solid to me - they mentioned bank-level encryption and they delete your documents after processing. It works great for business equipment too, not just real estate. Their system handles all kinds of depreciable assets including vehicles, equipment, furniture, computers - pretty much anything you'd put on a depreciation schedule. You don't have to recalculate everything; they'll help you continue your existing depreciation correctly based on your past returns.

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Jamal Carter

•8M

Just wanted to follow up about that taxr.ai site that was recommended. I decided to give it a try with my landscaping business equipment depreciation questions, and I'm actually really impressed. I uploaded my last couple years of Schedule Cs and depreciation schedules, and within about 20 minutes I got a really detailed analysis. It pointed out that I should have been using 7-year property class for my commercial mowers instead of 5-year, and showed me exactly how to correct it. Also helped me understand how to handle the business use percentage changes year-to-year for my truck without messing up the depreciation schedule. Worth checking out if you're dealing with complicated depreciation stuff like the original poster.

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Mei Liu

•8M

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Mei Liu

•8M

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Amara Nwosu

•8M

I need to apologize for my skeptical comment earlier. I was frustrated after spending weeks trying to get depreciation guidance from the IRS, so I lashed out. After seeing the video link, I actually tried Claimyr last week and got through to an IRS agent in about 15 minutes! The agent confirmed exactly what I needed to know about depreciation recapture when business use percentages vary year to year. She even emailed me the relevant sections from their internal manual. Saved me hours of research and gave me peace of mind that I'm doing it right. Sometimes it's worth admitting when you're wrong - this service actually works!

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AstroExplorer

•8M

For your question about business use percentages changing year to year - I handle this exact situation with my home office deduction. You're doing it right by calculating the full schedule as if 100% business use and then applying the actual business percentage each year. My CPA told me the leftover basis at the end just remains as part of your adjusted basis in the property. For example, if you have a $1000 item with 5-year depreciation but only use it 80% for business, you'll depreciate $800 over the 5 years and the remaining $200 stays as part of your basis. This makes sense because that portion was never deducted as a business expense.

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AstroExplorer

•8M

You don't "catch up" for prior years when the business use percentage increases. Each year stands on its own. So if it's 80% business use in year 1, then increases to 90% in year 2, you simply apply the appropriate percentage to each year's depreciation amount according to the schedule. The remaining basis at the end will reflect all those years of varying business use. There's no mechanism in the tax code to go back and claim more depreciation for prior years just because your business use increased later on.

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Giovanni Moretti

•8M

Just to add something about your third question on passive activity losses - I went through this exact situation with my rental property. You're correct that depreciation that was suspended due to passive activity limitations doesn't reduce your basis. But keep in mind those suspended losses carry forward indefinitely. When you eventually have passive income from the activity or dispose of the property in a fully taxable transaction, you'll get to use those suspended losses. So track them carefully! I use a spreadsheet that shows both what I've claimed and what's been suspended each year.

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