How do I? Determine when a business asset is
"placed in service"
The actual date a business asset is placed in service is
important because it affects when depreciation may be claimed for
tax purposes. Depreciation begins in the tax year that an asset is
placed in service. The placed-in-service date is especially
important in the case of end-of-tax year acquisitions.
If an asset is placed in service on December 31 by a
calendar-year taxpayer, depreciation is claimed on that asset for
that tax year. If the same asset is placed in service one day later
on January 1, depreciation deductions cannot be taken before that
new year. The placed-in-service date also determines whether certain
mid-quarter and half-year "conventions" will apply, which can mean
greater depreciation deductions if purchase and use are timed just
before the quarter or mid-year cut off date.
An asset is placed in service on the date that it is in a
condition or state of readiness for a specifically assigned function
in a trade or business or the production of income, which is not
necessarily the date of acquisition. An asset that is being used in
a trade or business is clearly placed in service. However, an asset
not put to use is most likely not placed in service, unless
everything in the taxpayer's power has been done to put the asset to
use. An example of this is a canal barge that was deemed placed in
service in the year it was acquired despite not being used until the
following tax year because the canals were frozen.
Another related rule is that an asset will not be considered
placed in service until the business actually begins operations. For
example air conditioners installed in a grocery store before the
store's opening were not considered placed in service until the
store was actually open for business. In many instances this is not
a bad thing, since a startup business usually has a limited amount
of income during its first year to offset with depreciation
deductions. Depreciation deductions in that case generally are more
valuable later in the business's development.
