Depreciation
What Is Depreciation?
Depreciation is a tax and accounting method used to allocate the cost of certain assets over their useful life.
It reflects the gradual reduction in value of assets such as buildings, equipment, and vehicles due to wear, age, or obsolescence.
Why It Matters
Depreciation allows businesses and certain investors to deduct part of an asset’s cost each year, reducing taxable income.
It is commonly used by businesses and real estate investors.
How Depreciation Works
When an asset qualifies for depreciation, its cost is spread over multiple years.
Each year, a portion of the asset’s cost can be deducted as an expense on a tax return.
The IRS provides depreciation schedules that determine how long assets can be depreciated.
Example
If a rental property owner purchases equipment for $5,000 that qualifies for depreciation over five years, they may deduct a portion of the cost each year.
Depreciation vs Amortization
- Depreciation applies to tangible assets such as equipment or buildings.
- Amortization applies to intangible assets such as patents or trademarks.
FAQs About Depreciation
Who can claim depreciation?
Businesses and certain investors who own qualifying assets.
Does depreciation reduce taxable income?
Yes. Depreciation deductions lower taxable income.
Can personal property be depreciated?
Generally only assets used for business or income-producing purposes qualify.
Related Terms
