Depreciation: Part II of a Ten Part Series “The Top Ten Tax Deductions.”

The depreciation expense is to provide for the matching of the cost of capital assets with the revenue they generate. There are 2 different methods of calculating depreciation expense: 1) Generally Accepted Accounting Principles depreciation where the cost of the capital asset more accurately reflects the actual expected useful life of the asset, and 2) tax depreciation which is a faster method of writing off the cost of capital assets. Under normal situations the depreciation written off for tax purposes is determined by a depreciation schedule from the Internal Revenue Service. In an effort to generate businesses purchasing capital assets, the government allows larger tax deductions for depreciation for the purchase of capital assets than Generally Accepted Accounting Principles does. The government allows businesses to write off as depreciation up to a $250,000 a year. By creating this increased tax deduction, it was thought that businesses would be more liable to invest in capital assets and thereby spur the economy.

Currently, the government uses the modified accelerated cost recovery (MACRs) tables for depreciation. It is a slower write-off of the cost of assets through depreciation than accelerated cost recovery (ACRS), but faster than Generally Accepted Accounting Principles depreciation. Also, component depreciation is allowed for the write-off of large assets.

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