What is Depreciation?

The tax laws and accounting standards that apply to the depreciation of business assets can be complex, confusing and difficult to decipher.  In general terms, depreciation is allowed on tangible and intangible property with a limited useful life of more than one year that is used in a trade or business or held for the production of income.

The information required for the depreciation calculations are as follows:

1. Property type – the 2 basic types of property are real and personal.  Real property includes buildings and their structural components.  Personal property includes all depreciable property other than real.

2. Service date – depreciation begins when an asset is first placed in a condition or state of readiness and availability for a specifically assigned function.

3. Useful life – the number of years that depreciable business equipment or property is expected to be in use.

4. Cost basis – depreciable basis equals acquisition cost less any salvage value.

5. Depreciation methods – how to spread the cost or other basis of an asset over its useful life.

6. First year conventions – refers to figuring how much of the cost you may depreciate the first year, based on when during that year you purchased and put the item to use in your business.

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Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.

3 thoughts on “What is Depreciation?

  1. dGuru

    Hello Mukesh,
    5 year asset used in business. Assumption: an asset is purchased for an on-going business. The asset depreciated for tax purposed during years 1 & 2. The business got “out of business”. Since the asset is now not being used in an active business, there is no need for the tax deduction (depreciation) and you do not need to calculate depreciation for years 3 – 5.

  2. IF AN ASSETS FIRST 2 YEAR USE FOR BUSINESS PURPOSE AND 3 YEAR NO BUSINESS WHY DEP. CHARGE IN 3 YEAR AS PER INCOME TAX ACT

  3. Hi Sir,

    Revenu Reg,
    1) Assets Sold Date or Invoice Billed
    2) Amount received Date,

    Which one we need to take for revenue perpose

    Regards,
    Shivakumar

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