On your business taxes, depreciation (also called capitalization, cost recovery, or amortization) lets you deduct the "used up" portion of an asset's cost every year, until the asset no longer retains any value or has been sold, destroyed, or otherwise disposed of. The concept of depreciation is based on the notion that business assets eventually wear out, get used up, or become obsolete.
With one notable exception (Section 179), depreciation is required for most "big ticket" business assets that have a useful life of more than one year and wear out over time, such as buildings, vehicles, equipment, office furniture, computers, and tools used by the business. Business assets must meet 3 conditions to be depreciable:
The asset must be used to produce business income, rent, or royalty payments.
There are exceptions for assets that failed to produce income, although that was their primary purpose.
The asset must wear out, decay, becomes obsolete, or lose value over time.
The asset has a useful life that can be measured and exceeds 1 year.
You're not allowed to depreciate consumable items like office supplies, even if they last more than a year. You're also not allowed to depreciate land, inventory, or leased property.
Once a depreciable asset is sold, bartered, discarded, or destroyed, the transaction is reported on your tax return. The reportable amount is determined by the asset's original basis, accumulated depreciation, any value you received in exchange for the asset, and any expenses involved in selling or disposing of the asset.
On your federal taxes, depreciation gets reported on IRS Form 4562.