Money Infant

Baby Steps to Financial Freedom

Tax Depreciation

In most countries the tax laws allow a business to recover the cost of assets used by the business in the production of income. Assets which are used up immediately or within the year can be deducted directly as an expense, however for those assets that have a longer life span the costs are recovered over time through depreciation.

In some countries it is permissible to recover the full cost of the asset in the year it is acquired, but others require the business to use depreciation over time to capture the costs of the declining asset. Even within the same country the rules can vary based on the type of taxpayer and the asset type.

In the case of the U.S. the IRS publishes a detailed guide (Publication 946 – How to Depreciate Property) to the useful life of a wide number of assets. U.S. tax depreciation is computed under the double declining balance method switching to straight line or the straight line method, at the option of the taxpayer.

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