Depreciation is an accounting method that spreads the cost of a long-term business asset — equipment, vehicles, buildings — over its useful life. The IRS sets the recovery periods; each year's deduction reduces your taxable income.
When a business buys a long-term asset — a delivery truck, a commercial oven, a server rack — the IRS generally doesn't let you deduct the full cost in the year of purchase (unless you use Section 179 or bonus depreciation). Instead, you recover the cost over the asset's "useful life" as defined by the IRS in Publication 946. Each year you take a portion of that cost as a depreciation deduction against your income.
Most business assets in the U.S. are depreciated using MACRS — the Modified Accelerated Cost Recovery System. MACRS assigns each asset class a recovery period (3-year, 5-year, 7-year, etc.) and an approved depreciation method (usually declining balance, switching to straight-line). A $30,000 piece of 5-year property under MACRS would produce larger deductions in early years and smaller ones later.
Straight-line depreciation spreads the cost equally over the recovery period (e.g., 20% per year for a 5-year asset). Accelerated methods like MACRS double-declining balance front-load larger deductions in early years — useful when you want to reduce taxable income sooner. Section 179 and bonus depreciation go even further: they allow immediate, full expensing in year one for qualifying property.
Depreciation is a non-cash expense — it reduces your taxable income without requiring an outflow of cash in that year. That makes it one of the most valuable line items on your tax return. However, if you're financing an asset and also depreciating it, track both the loan payments (cash out) and the depreciation deduction (taxable income reduction) separately. A CPA or bookkeeper can help you get the most out of these deductions. See IRS Publication 946 for the full MACRS tables and method elections.