Depreciation
The accounting practice of spreading the cost of a tangible asset, like equipment, over the years it will be used.
Definition
Depreciation spreads the cost of a tangible asset—a computer, camera, vehicle, or office furniture—across the years you'll use it, instead of expensing the whole purchase at once. Buy a $3,000 laptop you expect to use for three years, and straightforward straight-line depreciation records a $1,000 expense each year. The idea is to match the cost of the asset to the periods it actually helps you earn revenue.
In practice, tax rules add shortcuts. US small businesses can often deduct the full cost of equipment in the year of purchase using Section 179 or bonus depreciation, so your tax books and the economic reality can differ. Depreciation only applies to tangible assets with a useful life over a year; the equivalent concept for intangible assets is amortization, and land is never depreciated.
Why It Matters
Depreciation is one of the few deductions you get without spending new money each year, so handling it correctly directly lowers your tax bill. Whether to depreciate a $5,000 purchase over five years or deduct it all immediately is a real decision—taking it all now helps in a high-income year, while spreading it out preserves deductions for future years. Your tax preparer can run both scenarios.
It also keeps your profit numbers realistic. If you expense a $12,000 equipment refresh in one month, that month looks like a disaster and the next three years look artificially cheap. Depreciation smooths that, which matters when you're trying to judge real profitability or show a lender consistent earnings.
Examples
- 1
A videographer buys a $6,000 camera package and depreciates it over five years, recording a $1,200 expense annually.
- 2
A consultant buys a $2,500 laptop in a high-income year and uses Section 179 to deduct the full amount immediately.
- 3
An agency's books show a $30,000 van purchased two years ago at a book value of $18,000 after $6,000 of depreciation per year.
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