Determining Depreciable Basis

If you start a business you may already have equipment that you used for personal reasons that can be used in your business (e.g. computer, printer, fax machine, desk, etc.) or you may have just purchased some new equipment in anticipation of starting your business.

When you convert equipment from personal use to business use or to an income producing activity, for example to produce investment income, you’re allowed to claim a deduction for depreciation on the equipment.

What value do you assign to each piece of equipment for depreciation purposes?

In other words, what should the depreciable basis be for each piece of equipment?

IRS rules say, when you convert personal use property to business use. the value assigned to the property for depreciation purposes is:

. on the date of conversion .

The next question you may have is.

What is the adjusted basis of the property?

The adjusted basis of the property is generally what you originally paid for the property on the date of purchase. For example, if you bought a computer two years ago for $950, the adjusted basis for the computer is $950, your original cost.

Generally, except for real estate, which may increase in value, things like computers, printers, and furniture will generally decline in value over time. Therefore, the fair market value of such items will generally be lower than their adjusted basis (your original cost) on the date of conversion.

Example:

You started a consulting business and intend to convert the following personal-use items to business use:

• One computer
• One printer
• One desk
• One chair
• One file cabinet

Make a table like the one indicated below, which shows a description of each item and each item’s adjusted basis, fair market value, and Depreciable basis.

Fair market value is established when willing parties, unrelated to each other, having adverse interests in the transaction, and having all material facts in connection with the transaction, agree on a price for an item. This is referred to as an arm’s length transaction. Tax rules prohibit related party transactions since they’re not considered arm’s length transactions..

How to Determine Fair Market Value:

To determine fair market value you could check the classifieds, eBay, and other places to find out what people are willing to pay for the type of equipment you have. If you recently purchased items close to the date of conversion, your cost will probably be the same as the market value.

Compare the adjusted basis of each item to its fair market value and use the lower value for its depreciable basis.

Note that in the following table, the depreciable basis of each item is its fair market value. As mentioned earlier, the items listed tend to decline over time.

List of Items to be Converted to Business Use:

Date of Conversion: August 1, 201X