Depreciation is a term used to describe the gradual loss in value of property used to produce income. For internal accounting purposes, a company will deduct the cost of a piece of property over the number of years they expect to use the item before it will have to be replaced. For taxation purposes, the amount and method of depreciation is dictated by law. Depreciation tables are charts prepared by taxing authorities which help taxpayers calculate the allowed depreciation deductions.
Depreciation is a business tax deduction allowed in many countries. In the United States a business can deduct the entire cost of a limited amount of personal property in the year of purchase using a provision called a 179 deduction. The cost of all other business property is deducted rateably over the assigned life of the item using the appropriate depreciation tables for the chosen method. Different methods are assigned to property depending upon the nature of the item and its class life, or assigned life expectancy.
Different methods are required for real property than those approved for personal property. For depreciation purposes, real property refers to buildings but not land, which is never depreciated. This is based upon the assumption that buildings wear out but the earth remains. Real property class life differs between residential and nonresidential property, and separate straight-line depreciation tables exist for each property type.
Personal property, which is everything that is not real estate, is divided into categories and assigned a class life that can range from three to 20 years. The most common depreciation method used in the US is the modified accelerated recovery system (MACRS), which allows greater deductions in the early years. Two types of MACRS depreciation tables exist, the half-year convention and the mid-quarter convention. The choice is determined by when the property is purchased. If 40 percent or more of the property is purchased in the last quarter of the year, mid-quarter convention is required; in all other cases the half-year depreciation tables apply.
The method of calculating depreciation, and which property qualifies differs from country to country. In Canada depreciation is referred to as a capital cost allowance (CCA). Like the US, Canada assigns a class life and method of depreciation to various assets. Patents, licenses, and concessions are required to use straight-line, while most other items are depreciated using a declining balance method. Depreciation tables are issued by the Canada Revenue Agency defining the class life and appropriate depreciation percentages for various kinds of property.
In Austria, assets which cost over a specified amount must be depreciated using straight-line depreciation tables. Australia refers to depreciation deductions as a capital allowance and requires property which costs over a specific to be depreciated, while lower cost items are allowed to be deducted from the tax returns in the year of purchase. In the United Kingdom the capital cost allowance varies depending upon both the type of property and on the size of the business filing the tax return.