What does Depreciation mean?

Depreciation is a deduction permitted on income tax returns related to the deterioration of property over time or because of use. Except for land, property including buildings, equipment, motor vehicles, and furniture lose their value over time because of wear and tear. The same is likewise true for patents and copyrights.

The Internal Revenue Service has defined for each type of property its normal useful life, over which time the total value of that property can be depreciated and thereby deducted for income tax purposes. For a property to be depreciated for income tax purposes, the property must be owned by the taxpayer, used at least partially if not wholly for a business purpose, and have a useful life for greater than one year.

A property cannot be depreciated for more than the original purchase price or cost basis of the property. In addition, a taxpayer cannot depreciate any property that the taxpayer puts into service and disposes of in the same year.

The rules governing depreciation of property for income tax purposes are defined by the Internal Revenue Service in Publication 946, How to Depreciate Property. Taxpayers must use Form 4562, Depreciation and Amortization, when calculating and submitting depreciation as a part of their tax return.

(Tags - IRS - Tax Credits - tax debts )

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