TL;DR

Depreciation spreads the cost of a long-term asset (like a laptop or camera) over the years you use it, rather than expensing it all at once. It reduces your taxable income each year and gives a more accurate picture of asset value.

Key Points

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Common assets that depreciate: computers, cameras, vehicles, office furniture, and specialized equipment

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The IRS Section 179 deduction allows small businesses to expense certain assets in full the year of purchase rather than depreciating them

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Straight-line depreciation divides the cost evenly over the useful life; accelerated methods front-load more depreciation in early years

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Depreciation is a non-cash expense — it reduces taxable income without requiring cash outflow

How Depreciation Works

When you buy a laptop for $2,000, you don't expense it all in year one under Accrual Accounting. Instead, you spread the cost over its useful life — say 5 years — recording $400 in depreciation expense each year¹. The most common method is straight-line depreciation: (cost minus salvage value) / useful life. A $2,000 laptop with a $200 salvage value over 5 years = $360/year. The undepreciated portion (original cost minus accumulated depreciation) is the 'book value' of the asset shown on your Balance Sheet. When the asset is fully depreciated, its book value equals zero or the salvage value.

Depreciation as a Tax Deduction

Depreciation is a tax-deductible expense — it reduces your taxable income without requiring additional cash outflow. The IRS allows two key approaches for small businesses: (1) Section 179 deduction lets you expense the full cost of qualifying equipment in the year of purchase (subject to annual limits). (2) Bonus depreciation allows 100% expensing of certain new assets, though rates may change year to year. For small purchases like a $300 keyboard, immediate expensing under Section 179 simplifies recordkeeping. For major assets like vehicles or specialized equipment, standard depreciation may be more beneficial².

Tracking Depreciation in Your Books

Each depreciable asset should be tracked in a fixed asset register — a list of all assets with their cost, purchase date, useful life, depreciation method, and accumulated depreciation to date. Accounting software typically maintains this automatically once you set up the asset. The annual depreciation amount flows through to your Profit & Loss Statement as an expense, reducing Net Income and ultimately reducing the tax you owe. If you sell a depreciated asset for more than its book value, you may owe taxes on the gain — your accountant can advise on the specifics for significant asset sales.

References

FreshBooks — What Is Depreciation? Methods, Formulas & Examples ↗

freshbooks.com

IRS — Deducting Business Expenses ↗

irs.gov

Last updated: June 9, 2026

Related Terms

Balance Sheet

A financial statement that shows a business's assets, liabilities, and owner's equity at a specific point in time, providing a snapshot of the company's financial position.

Profit & Loss Statement

A financial statement that summarizes all revenues, costs, and expenses over a specific accounting period, showing whether a business made a profit or incurred a loss.

Tax Deduction

A business or personal expense that can be subtracted from gross income to reduce the total taxable income, thereby lowering the amount of tax owed.

Operating Expenses

The ongoing costs incurred in the day-to-day operation of a business, including rent, salaries, software subscriptions, marketing, and utilities, but excluding cost of goods sold and capital expenditures.

Accrual Accounting

An accounting method in which revenue is recorded when it is earned and expenses are recorded when they are incurred, regardless of when cash is actually received or paid.

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