You may have heard the term “depreciation” used in describing the loss in value of a new car being driven off the lot or something losing value over time. When talking about depreciation in regard to your taxes, it is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It’s essentially accounting for the cost future loss in value of real or personal business property over a period of time.
It is calculated using the cost of the property and its IRS stated useful life. There are several methods of depreciation but the Modified Accelerated Cost Recovery System (MACRS) is the method used for most business property and is the method that Credit Karma Tax supports. You can find more information on exactly how to use this method here. Depreciation is recorded and deducted using Form 4562.
Depending on the method you use, you can take a depreciation deduction each year over the useful life of your property until the cost is completely recovered. If you sell the property before the cost is recovered, your deduction for that year will only be a portion of the depreciation amount for the full year.