Depreciation Expense - Accounting

Depreciation in accounting refers to the allocation of the cost of a tangible asset over its estimated useful life as determined by IRS rules. It permits companies to earn revenue from assets they own but allocates the cost for tax purposes over a period of time. Depreciation expense is an offset to income. The higher the depreciation expense, the lower the income for tax purposes. In short, higher depreciation expense results in lower state and federal taxes.

Depreciation expense can be calculated on a straight-line basis or on an accelerated basis. Accelerated depreciation results in lower taxes in the early years of an asset's useful life and greater cash flow.

Many investors prefer accelerated depreciation because it increases cash flow. It's like getting an interest fee loan from the state and federal governments.

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