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4.4 Depreciation

4.4 Depreciation
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  • Math Help

    According to the Internal Revenue Service (IRS), "depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property."

    "Most types of tangible property (except, land), such as buildings, machinery, vehicles, furniture, and equipment are depreciable. Likewise, certain intangible property, such as patents, copyrights, and computer software is depreciable."

    "Depreciation begins when a taxpayer places property in service for use in a trade or business or for the production of income. The property ceases to be depreciable when the taxpayer has fully recovered the property's cost or other basis or when the taxpayer retires it from service, whichever happens first."

  • Consumer Suggestion

    Want to know if your property is tax deductible? Read A Brief Overview of Depreciation from the Internal Revenue Service website to find out. If it is, you can download the appropriate form and learn how to report depreciation on your tax return.

  • Checkpoint Solution

    Sample answer:

    I would choose an accelerated depreciation method. Depreciation counts as an expense, so depreciating more of the asset's value early will make it possible to maximize early tax deductions. Also, accelerated methods are usually more accurate. I would choose sum of the years-digits depreciation instead of double declining-balance depreciation to avoid having to make adjustments at the end of the asset's useful life. Note that although I chose sum of the years-digits depreciation, straight-line depreciation is often used for financial accounting (as opposed to managerial accounting) so that the company can report a higher net income in the earlier years for their investors.

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    system user
    Guest   6 years ago |
    Thanks for giving people a realistic idea of the cost of gym equipment. I work part-time at a fitness center. Sometimes people complain about paying $40 a month for membership. I try to explain how much it costs us to buy equipment, pay salaries, pay rent, pay utilities, and all of our other expenses.
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    system user
    Ron Larson (author)6 years ago |
    I like the graphs in Example 6. My own approach to math is highly visual. When I can see a graph or a picture, then I understand the concept better.
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