Depreciation means the rate a piece of equipment, machinery or other business asset decreases its financial value because of wear and tear. The financial value is the estimated price the asset will sell for if sold on the open market. The rate of depreciation is usually computed by dividing the cost of acquisition or its purchase value by the number of years of its useful life. The useful life is the length of time beginning from date of purchase or first use, to the time it is expected to become too costly to use due to maintenance problems. The useful life is normally calculated or estimated; but, is based on commonly accepted time lengths of identical or similar forms of assets.
Formerly, a business asset with a useful life of one year is depreciated in the business books over a number of years. This means that after one year, that property is already worthless (meaning no more income is being derived from its use), yet the business still pays tax for it. Furthermore, the property tax paid on the first year or full year of useful life is over-adjusted, as the tax is based on a little-depreciated value, when it should have been based on a fully-depreciated value.
However, Section 179 of the Internal Revenue Code has raised the total amount that can be deducted as depreciation cost on any business asset. Today, $100,000 may be deducted from the value of the asset instead of the former $25,000. Furthermore, the total amount is adjustable for inflation and, therefore, may grow still larger based on the yearly inflation rate.
Deductible under the Job Growth and Reconciliation Act of 2003, under certain conditions, are machinery and equipment, furniture and fixtures, and computer software.
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