What is depreciation, and why does it matter?

When a business buys something that lasts beyond the current year, a vehicle, equipment, machinery, a building, accounting generally requires the cost to be allocated across the asset's useful life rather than expensed immediately. That annual allocation is depreciation. The logic is matching: the asset generates revenue over several years, so its cost should appear against revenue in those same years. Land is not depreciated, since it does not wear out, and inventory is handled separately as cost of goods sold.

The tax significance is that depreciation is a deduction requiring no cash outlay in the years it is claimed. You paid for the truck once; you deduct a portion of it annually for years afterward. That is a large part of why a profitable business can be cash-poor and why a cash-generating business can report modest profit, and it is why lenders and buyers frequently look at EBITDA, which adds depreciation and amortization back to isolate operating performance from these accounting allocations.

Two provisions let businesses accelerate the deduction rather than spreading it, and they matter for planning. Section 179 permits expensing the full cost of qualifying property in the year it is placed in service, up to annual limits. Bonus depreciation permits an additional immediate deduction on qualifying assets, at a percentage that has been scheduled to change over time, so the current rate is worth verifying rather than assuming. Both accelerate rather than increase the total deduction, since you cannot deduct more than the asset cost, which means the decision is about timing and your expected future tax rates. Selling a depreciated asset for more than its remaining book value also triggers depreciation recapture taxed as ordinary income, which is the part that surprises people at disposal.