Depreciation

Depreciation is an accounting method that allocates the cost of a tangible asset over its useful life. It reflects the reality that physical assets like equipment, vehicles, and buildings lose value as they age and wear out.

Common depreciation methods include straight-line (equal amounts each year), declining balance (larger deductions early), and units of production (based on usage). For tax purposes, the IRS provides guidelines through MACRS (Modified Accelerated Cost Recovery System) that specify recovery periods for different asset types.

Depreciation serves as a non-cash expense that reduces taxable income, providing a significant tax benefit for businesses and real estate investors. Understanding depreciation is essential for accurate financial reporting, tax planning, and evaluating the true cost of owning assets.