Depreciation

This is a tax deduction that is taken to reflect the wear and tear and gradual decline in value of an asset used in business. Although there are some options for depreciation, the tax law requires that the depreciation deduction be taken even if a taxpayer prefers not to (this is sometimes called the “allowed or allowable” rule). If a taxpayer fails to take the deduction, he/she will still be required to account for the depreciation as if it were taken when the property is sold and pay taxes on the depreciation to the extent of any gain. For purposes of the deduction, tax law assigns a life to various types of business assets and the asset is depreciated over that period of time. Generally, business assets placed in service would be depreciated over 3, 5, or 7 years, except for real estate which would be 27.5 or 39 years.

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