Depreciation Glossary
Essential terms and definitions for understanding depreciation and amortization calculations.
Depreciation Tax Shield
The reduction in income taxes that results from taking an allowable deduction from taxable income. Depreciation expense reduces taxable income, creating a tax benefit.
Book Value
The net value of an asset on a company's balance sheet, calculated as the original cost minus accumulated depreciation. Also known as carrying value.
Section 179
An IRS tax code that allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year.
Salvage Value
The estimated residual value of an asset at the end of its useful life. This is the amount you expect to receive when you dispose of the asset.
Useful Life
The estimated period over which an asset is expected to be used by a business. The IRS provides guidelines for useful life of various asset categories.
Accumulated Depreciation
The total amount of depreciation expense that has been recorded for an asset since it was put into use. It is a contra-asset account.
Straight Line Depreciation
A depreciation method that spreads the cost of an asset evenly over its useful life. Annual depreciation = (Cost - Salvage Value) / Useful Life.
Double Declining Balance
An accelerated depreciation method that depreciates assets twice as fast as the straight line method in the early years of an asset's life.
MACRS
Modified Accelerated Cost Recovery System - The current tax depreciation system in the United States, introduced in 1986.
Form 4562
The IRS form used to claim deductions for depreciation and amortization, as well as Section 179 deductions.