Depreciation
What does "Depreciation" mean in law?
Depreciation is the tax mechanism allowing a taxpayer to recover the cost of a tangible asset used in a trade or business or held for the production of income over the asset's useful life, as authorized by IRC Section 167 and the accelerated cost recovery system (MACRS) under Section 168. Depreciation is not optional when available; it reduces basis whether or not the taxpayer actually claims it (a concept known as 'allowed or allowable' depreciation under Section 1016). The Modified Accelerated Cost Recovery System assigns assets to recovery period classes and prescribes either declining balance or straight-line methods. Section 179 expensing and bonus depreciation under Section 168(k) allow immediate or accelerated write-offs, significantly altering the timing of deductions.
Definition
Depreciation is the tax mechanism allowing a taxpayer to recover the cost of a tangible asset used in a trade or business or held for the production of income over the asset's useful life, as authorized by IRC Section 167 and the accelerated cost recovery system (MACRS) under Section 168. Depreciation is not optional when available; it reduces basis whether or not the taxpayer actually claims it (a concept known as 'allowed or allowable' depreciation under Section 1016). The Modified Accelerated Cost Recovery System assigns assets to recovery period classes and prescribes either declining balance or straight-line methods. Section 179 expensing and bonus depreciation under Section 168(k) allow immediate or accelerated write-offs, significantly altering the timing of deductions.
Example
A law firm purchases $50,000 worth of office furniture with a seven-year MACRS recovery period and may either depreciate it over seven years using the declining balance method or elect to expense the full amount immediately under Section 179.