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."

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.

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.