What is Depreciation?
Learn about depreciation and how you can use it to deduct business expenses. Includes frequently asked questions.
Updated on November 28th, 2023
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Depreciation is the gradual devaluing of assets over time. Assets that are purchased for your business will slowly depreciate in value, but you can count that depreciation as a tax deduction.
Below is a table outlining the various depreciation methods, as well as a list of frequently asked questions about depreciation expenses.
Depreciation Methods:
Method | Description | Formula |
|---|---|---|
Straight Line Depreciation | The same expense amount is deducted every year for the entire useful life of the asset. | Depreciation Expense = (Cost – Salvage value) / Useful life |
Double Declining Balance Depreciation | A greater value is deducted during the earlier years to show an increased depreciation during the asset's most valuable years. | Expense = (100% / Useful life of asset) x 2 |
Units of Production Depreciation | Depreciation is based on the total hours that the asset is used, or that total units that it produces. | Depreciation Expense = (Number of units produced / Life in number of units) x (Cost – Salvage value) |
Sum-of-The-Years-Digits Depreciation | Accelerated depreciation that deducts more in the earlier years and is calculated using the time that the asset has been owned. | Depreciation Expense = (Remaining life / Sum of the years digits) x (Cost – Salvage value) |
FAQs:
What do you mean by depreciation?
Depreciation is the gradual devaluing of assets over time. You can count depreciation of your business assets as a tax deduction.
What is depreciation and how is it calculated?
Depreciation is the gradual devaluing of your business's assets over time.
What are the three depreciation methods?
Straight line depreciation, double-declining balance depreciation, and units of production depreciation.
Sum-of-the-years-digits depreciation is another depreciation method.
Why is depreciation so important?
It is important for the purpose of accounting itself, and it gives you a clear picture of the value of your assets. A depreciation tax shield also shields your business from income tax by allowing you to write off a certain percentage of your depreciating assets.
What is a depreciation tax shield?
A depreciation tax shield shields businesses from income tax by allowing them to write off a certain percentage of their depreciating assets. Depreciation of fixed assets could include cars, computers, or tools that are owned by and used for your business. This is sometimes called recoverable depreciation.
Is software depreciation a legitimate expense?
Yes. It can be deducted as an expense over a 36-month period after it is purchased. Software depreciation is not applicable when a new computer is purchased and the software comes pre-loaded on the computer. You must purchase the software separately in order to count it as a depreciating asset.
Where can I find the latest depreciation rates and rules?
Go to irs.gov to learn more. The IRS publishes updated depreciation limits and rules on their website.
What is a depreciation schedule?
A depreciation schedule shows the life length of a particular asset and how much it will depreciate in value every year for the duration of that lifespan.
Where can I find a depreciation calculator?
You can use an online calculator to determine the depreciation of your business property by inputting the type of asset, the depreciation method, etc.