Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value. Businesses depreciate long-term assets for both tax and accounting purposes.
For tax purposes, depreciation is an expense that will reduce the amount of income you are taxed on. In you question, you used $20,000 profit (or net income) as part of the example, but depreciation is used to determine your profit. The $15,000 would be deducted from the $20,000 so you would have $5,000 in taxable income.
Depreciation also affects your basis in business property. This affects your taxes when you sell/dispose of the asset. For example, if you have equipment you purchased new for $10,000 you normally would depreciate it for ten years so you would have a deduction each year for $1000.
If there was no depreciation and you sold the equipment after five year for $7000, you would have a $3,000 loss. (Basis=purchase price of $10,000) which could be used to reduce other business income.
However, because you claimed $5,000 in depreciation, your adjusted basis is $15,000. $15,000 minus $7000 equals $8000 gain- which is then added as business income.
I hope this either provides a basic explanation or makes you realize how complicated depreciation can be.
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