Overview of Depreciation

Expenses typically fall into two categories: those that are deductible right away – for example, a dinner with a client – and those that have to be deducted over a longer period of time. An example of the latter expense is depreciation. Depreciation is used for many larger purchases like cars or a renovation on a room you rent out. You will get many years of use out of these types of assets (the car and the room renovations). However, they will both be worth less each year as they experience normal wear and tear from aging. Depreciation tries to capture this by spreading the cost out over the life of the assets. If you spent $10k on the room renovations or the car, and you determine they have a useful life of 5 years, you would get to deduct $2k of depreciation ($10k divided by the 5 year useful life) on your taxes each year.  

Sometimes it can be challenging to determine whether something should be expensed or depreciated over time. For example, you might be able to expense the cost of a laptop you use for work, or furniture for a room rented on Airbnb. An accountant can help you if you’re not sure if something should be depreciated. However, Section 179 allows for most business expenses (except for real estate) to be expensed in the year it is purchased (more details on this in the Section 179 section).