depreciationdeduction

Depreciation deduction is a tax deduction that lets businesses recover the cost of tangible assets over time through annual allowances. The deduction recognizes that assets such as equipment, vehicles, and buildings wear out, become obsolete, or lose value as they are used in the production of income.

To qualify, property must be used in a trade or business or held for the production of income and have a determinable useful life beyond one year. The deduction is generally based on the asset's basis—often its purchase price plus any improvements—less any salvage value. Certain costs, such as installation, may be capitalized and included in the basis.

Common methods include straight-line depreciation and accelerated methods such as declining-balance or sum-of-years-digits. In the United States, the tax code largely relies on MACRS, which assigns assets to recovery classes with specified lifetimes and uses specific conventions, such as the half-year convention, to determine annual deductions. Taxpayers may also elect to expense part of the cost immediately under provisions like Section 179 and, for qualifying property, to take bonus depreciation in the first year.

Depreciation reduces the asset's tax basis, which affects gain or loss on disposal. If the asset is sold for more than its adjusted basis, depreciation recapture may be taxed at ordinary income rates. Tracking depreciation also involves keeping records of costs, class lives, and conventions, and complying with jurisdiction-specific rules.

The depreciation deduction provides a method to align tax deductions with the asset's economic life, smoothing income over time and encouraging capital investment. Businesses should consult tax guidance or a professional to apply the rules correctly for their jurisdiction and property type.