an accounting technique in which the cost of an asset is allocated over its useful life. A deduction to reflect the gradual loss of value of business property as it wears out. Former IRC (check if this IRC provision is current here) §167. See Accelerated Cost Recovery System; Modified Accelerated Cost Recovery System.
The law assigns a tax life to various types of property, and his or her basis (cost) in such property is deducted over that period of time. (For assets put in service after September 8, 2010 and before January 1, 2012, a special rule allowing 100% “bonus” depreciation allows businesses to write off the full cost of qualifying assets in the year they are purchased and placed in service.) See Accelerated Depreciation.
U.S. and other Developed Countries International Tax Meaning
An accounting technique in which the cost of an asset is allocated over its useful life.
Sum-of-the-years’-digits Depreciation (SYD)
A depreciation calculated by a method of allocating the cost of an asset over its useful life. A fraction is computed each year, which is applied against the depreciable amount. The numerator is the number of years left to be depreciated; the denominator is the sum of the years’ digits of the depreciable life. The formula for the denominator is N (N +1)/2 where N = the depreciable life. Sum-of-the-years’-digits depreciation is generally in use for tax purposes only for assets placed in service before 1981.
See also other Tax Terms and Definitions in U.S.A.
Example of Depreciation:
An automobile used in business cost $10,000 and has a 4-year depreciable life. Sum-of-the-years’-digits depreciation results in the deductions shown in Table 7 below.
Code Sections about Depreciation
- Sec. 167. Depreciation
- Sec. 216. Deduction of taxes, interest, and business depreciation by cooperative housing corporation tenant-stockholder
- Sec. 280F. Limitation on depreciation for luxury automobiles; limitation where certain property used for personal purposes
- Sec. 1357. Items not subject to regular tax; depreciation; interest
IRS Publications about Depreciation
- Publication 463, Travel, Entertainment, Gift and Car Expenses
- Publication 527, Residential Rental Property
- Publication 534, Depreciating Property Placed In Service Prior to 1987
- Publication 535, Business Expenses
- Publication 538, Accounting Periods and Methods
- Publication 550, Investment Income and Expenses
- Publication 551, Basis of Assets
- Publication 587, Business Use of Your Home
- Publication 946, How to Depreciate Property
State Law about Depreciation
- CA – Bonus Depreciation
- ME – Depreciation/Section 179
- NY – Bonus Depreciation
- NY – Depreciation
- OK – Bonus Depreciation
- PA – Bonus Depreciation
Description and Definition of Depreciation
A deduction to reflect the gradual loss of value of business property – such as office equipment, vehicles, buildings, and furniture – as it wears out or becomes obsolete. The tax law assigns a life to various types of property and your basis in such property is deducted over that period of time. The tax law specifies the depreciation term for specific types of assets.
If the expense is assumed to be incurred in equal amounts in each business period over the life of the asset the depreciation method used is straight line (SL). If the expense is assumed to be incurred in decreasing amounts in each business period over the life of the asset the method used is said to be accelerated. Two commonly used variations of the accelerated method of depreciating an asset are the sum-of-years digits (SYD) and the double-declining balance (DDB) methods. Frequently, accelerated depreciation is chosen for a business' tax expense but straight line is chosen for its financial reporting purposes.