The Tax Implications of Accumulated Depreciation

You may deduct depreciation expense on your tax return.

The Internal Revenue Service (IRS) allows a corporate or individual taxpayer to deduct depreciation expense in fiscal filings at the end of each year. If you operate fixed assets for business purposes, you may depreciate these assets.

Depreciation

Depreciation is a financial convention that lowers the value of tangible assets, or fixed assets, that you own and operate in business activities. Tangible assets are resources that you most likely will use for more than 12 months. Examples are property, plants and machinery.

Accumulated Depreciation

Accumulated depreciation is the total depreciation that you have deducted from a fixed asset value. For example, you bought a car three years ago. The automobile value was $10,000, and you opted for a five-year depreciation term. Accordingly, the annual depreciation is $2,000 ($10,000 divided by 5). After three years, the accumulated depreciation is $6,000 ($2,000 times 3).

Fiscal Implication

Accumulated depreciation has a positive fiscal implication. Unlike rent, interest and groceries, you do not pay for depreciation. Yet depreciation expense lowers your tax debt. For instance, the $6,000 accumulated depreciation that you recorded on the car was fiscally advantageous to you. It lowered your taxable income over three years.

References

• Internal Revenue Service: Property and Equipment Accounting
• Internal Revenue Service: Overview of Depreciation