In plain English
Straight-line depreciation divides cost (less any salvage value) by the years of use. Tax depreciation follows its own rules and can differ from the books.
Give your preparer the invoice, date placed in service and business-use percentage.
Why it matters
Depreciation spreads the cost of equipment across the years it helps you earn money. Without it, the year you buy a truck looks like a loss and later years look more profitable than they are. That makes it hard to price jobs or compare one year with another.
It is also one of the most common places where books and tax returns differ. Tax rules can allow faster write offs than your books show. Recording depreciation consistently, and keeping the details your preparer needs, avoids confusion when the two figures do not match.
Worked example
$6,000 equipment over five years is $1,200 a year, or $100 a month.
How to handle it
- Record each equipment purchase to a fixed asset account with the invoice and the date it was placed in service.
- Choose a useful life and method for your books, ideally confirmed with your accountant.
- Post depreciation monthly or yearly as a debit to depreciation expense and a credit to accumulated depreciation.
- Track each asset in a register so you can see cost, depreciation to date and book value.
- At year end, ask your preparer for the tax depreciation schedule and decide whether to adjust the books to match.
Common mistakes
- Expensing an expensive asset all at once in the books without checking your policy, which distorts that year's profit.
- Starting depreciation from the purchase date instead of the date the asset was put into use, which can shift expense between periods.
- Continuing to depreciate after an asset is fully depreciated or sold, which overstates expenses.
- Not giving your preparer the purchase details, which can mean missed or incorrect tax depreciation.
Not the same as: Amortization
Depreciation applies to physical assets like vehicles and equipment. Amortization applies to intangible assets such as purchased software rights or certain startup costs. See Amortization.
Go deeper
- Depreciation Basics for Small Business Owners: What depreciation is, how straight-line works, the difference between book and tax depreciation, and how to record it without overcomplicating.
- Equipment Purchases: Records for Expense vs Capitalize: What to document when buying equipment, how to keep an asset record, and the questions that decide whether to deduct now or spread over time.
Related terms
- Double-entry bookkeeping: A system where every transaction is recorded in at least two accounts so the books stay in balance.
- Equity: The owner's stake in the business: what is left after liabilities are subtracted from assets.
- Deferred revenue: Money received before you have earned it, recorded as a liability until you deliver.
Common questions
What is depreciation?
Spreading the cost of a long-lived asset over its useful life as an expense.
Can you give an example of depreciation?
$6,000 equipment over five years is $1,200 a year, or $100 a month.
Does depreciation affect my cash?
No. It is a non cash expense. The cash left when you bought the asset or made loan payments, and depreciation simply spreads the cost in the reports.
Should I use the same depreciation as my tax return?
Many small businesses do for simplicity, but it is a choice. Book depreciation can reflect how long you really use an asset. Discuss it with your accountant.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.