Depreciation

What is depreciation?

Depreciation is an accounting method that spreads the cost of a long-term asset over its useful life. Instead of recording the entire cost of a work truck or equipment as an expense when you buy it, you expense a portion each year as it wears out.

For contractors, depreciation applies to vehicles, tools, equipment, and other assets that lose value over time through use.

Why depreciation matters

Depreciation provides two key benefits:

• Tax deductions — Depreciation reduces your taxable income each year, spreading the tax benefit over time
• Accurate financial reporting — It matches the expense of the asset to the years it generates revenue
• Planning for replacement — Tracking depreciation reminds you that equipment will eventually need replacing

Common depreciation methods

The IRS allows several methods. Straight-line depreciation expenses the same amount each year. Accelerated methods front-load more expense in early years. Many small businesses use Section 179 to deduct the full cost of qualifying equipment in the year of purchase—consult your accountant for what's best for your situation.