What cannot be depreciated?

Not all property used in your business can be depreciated. Land retains its usefulness indefinitely, and is therefore not depreciable. Inventory and property that you lease or rent is not depreciable, either. But the cost of permanent improvements to property you lease can sometimes be depreciated. Your accountant can help you understand the rules about these leasehold improvements.

Intangible assets such as patents, trademarks, subscriber lists, and business licenses give your business valuable rights - but they are not depreciable. Instead, they are handled by a method known as amortization (the process of allocating the original cost of an intangible asset to the periods benefited). Intangible assets should be amortized on a straight-line basis over their useful life. Only those intangible assets that were purchased can be amortized; those that your business created are neither depreciable nor amortizable.

Depletion (the process of allocating the original cost of a natural resource to the periods benefited) is used for natural resources that benefit the business for longer than one year. For instance, coal, sand, and gravel holdings are all subject to depletion rather than depreciation or amortization. Depletion is handled by a method similar to units of production.

If you have property that may need to be depleted or amortized, ask your accountant for details.