What Is Depreciation? Definition and Meaning

Depreciation is an annual income tax deduction that allows an organization or taxpayer to recover the cost or other basis of certain property over the time you use the property. Depreciation is primarily for businesses or contractors who are looking to write off their business expenses. It is an allowance for the wear and tear, deterioration, or obsolescence of the property. There are rules on guidelines what, when, and how depreciation works.

Get your taxes done on eFile.com - the eFIle Tax App helps you claim business income, deductions, and deprecation of assets and handles the complicated calculations. See how to claim deprecation with eFile.com.

Related: Learn what to do with a 1099 you received.

As a business owner or self-employed person, minimize your taxes by reporting all your business expenses to offset your self-employment tax. Keep track of receipts and statements that show your purchase of a depreciable asset that you plan on writing off. As you work through the business section in your eFile account, you will be able to add your business details, income, expenses, and deprecation.

Depreciation of Assets

When you invest in or purchase assets for your business and expect them to lose value over regular use and time, this deduction is for you. The property or asset in question must be something you own - it cannot be rented or leased. Examples of depreciable property include machinery, vehicles, buildings, furniture, equipment, and computers or phones.

The property must meet these criteria:

  1. It must be owned by you.
  2. It is used in a business or income-producing activity.
  3. It has a determinable useful life.
  4. It is expected to at least one year.
  5. It cannot be excepted property (certain intangible property, term interests, equipment which was used to build capital improvements, or property that did not last a full year).

In most cases, business owners and contractors will use straight-line depreciation or a Section 179 Depreciation. When you prepare your return on eFile.com, you are asked which depreciation method you wish to use. If you are an experienced or well-versed business owner, you may elect to use a depreciation method that benefits you the most. However, most taxpayers will be recommended to use the simplest method which is the Section 179 method. eFile then handles all the complicated business tax forms, including Schedule C and Form 4562 for Depreciation and Amortization. You can eFileIT these forms on eFile.com.

To calculate depreciation, we can use straight-line depreciation to better understand how this is figured. You can take the assets salvage value (the expected value of the property at the end of its usefulness or life). Take this estimated figure and divide it over the number of years you expect it to last. When entering into your eFile account, enter the amount you are deducting this year - eFile helps you get the most out of your deduction each year based on the full value of the asset.

Deprecation Limits

The IRS limits the deduction based on the type of property. For 2024, the limits for certain assets are:

  • Property total: $1,220,000
  • Sport utility vehicle or SUV: $30,500.

This $1,220,000 limit can be reduced (to as little as zero) by the cost of the 179 property or asset for the year it was placed into service if that property price exceeds $3,050,000. In other words, if your expenses were greater than or equal to your business income, you can reduce to $0.

When to Depreciate Property

To determine if you may need to or should depreciate property, decide what type of asset it is based on how you expect it to perform over time for your business. In most cases, you can write off expenses for your business on Schedule C which is done in your eFile account when adding your income and expenses.

In general, if you expect the asset to last a while and it benefits you more to partially write it off each year, then you should depreciate it. You should instead write off assets that last for or apply to only the tax year they were put into place. Examples of tax write offs for the self-employed would be mileage for the year, utility expenses, advertisements, training course fees, travel expenses, or rent fees.

The calculations for depreciating assets can get complicated - use eFile.com to do these for you so you get your maximum deduction which you are entitled to. Get started with your 1040 business return: eFile.com offers the most savings when preparing a self-employed individual return with Schedule C. We handle all the complicated forms and produce the same return that you would find on other tax preparation platforms for up to 60% less.

Review this page of deductible business expenses for more details.

Additional Resources