Tax depreciation is a method of recovering the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.
Depreciation starts when you place your trade or business property in service for either: 1) use in a trade or business; 2) to produce income; or 3) for the production of income. If you want to depreciate property, you must: open a class in your accounting records for this property; and identify the property by name and number.
Tax depreciation is an allowance made for the wearing out, decay or other deterioration of tangible property and certain capitalised costs incurred in connection with the acquisition of real property. An allowance is allocable as depreciation expense if it is recognized as part of the cost, or if it relates to such cost, of an asset. Depreciation is based on the concept that capitalised assets are subject to deterioration or exhaustion through use, even though they may still be capable of service. It merely establishes a method for charging off (deducting) a certain portion of the cost of a long-term investment against current income in order to reflect the consumption of its value. Depreciation is most commonly set up on a straight-line basis, under which an equal amount of depreciation expense is charged against income each year over the estimated useful life of the asset. In many instances, however, it is more desirable to accelerate or front load depreciation expenses in early years and defer them in later years.
This method provides for recovery at a uniform rate throughout the recovery period (which may be several years) of the adjusted cost or other basis plus that fraction of the remaining adjusted cost or other basis applicable to each taxable year in such period.