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Depreciation or Amortization of Expenses

Generally, taxpayers cannot deduct the cost of items with a ldquo;useful life”—at least not in the same way as they can deduct current expenses. Instead, when they buy an asset for their business, the IRS treats the purchase as an investment in their business. Taxpayers must deduct the cost over a number of years, specified in the tax code (with one important exception, discussed below). This deduction is usually known as “depreciation.” It is occasionally known as a “depreciation expense” or an “amortization expense.” Despite the terminology, these terms describe the same thing: spreading out the deduction of these types of asset purchases over the course of several annual tax cycles.

The rules for depreciating or amortizing expenses can be confusing, and taxpayers need to know the rules that apply to each different type of property. The IRC sets absolute limits for some depreciation deductions, and it sets the number of years that businesses can depreciate assets. IRC § 179 contains an important exception to the long-term write-off rules: small businesses can deduct most of their capital expenditures in one year.

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