What is Depreciation?

Depreciation is the accounting practice of recording the decreasing value of a fixed asset, such as a building or piece of equipment, over time, or, effectively, spreading the tax deduction for the cost of the asset over time.

The IRS has created set schedules which describe the number of years over which a business can amortize the cost of a business asset for the purpose of tax deductions. The number of years is different for each type of asset or equipment.

In its simplest form, depreciation is straight-line, meaning the total cost of the asset is divided evenly across the number of years on the IRS schedule.

There is also accelerated depreciation, where more of the cost is depreciated in the first years and less of it is depreciated afterward, also according to what’s allowed by IRS guidance. Depreciation is listed as an Operating Expense in a company’s accounting books.