A tax deduction that an entity claims for the natural wear and tear of its assets (tangible assets) over their useful lives. Tax depreciation is reflected in the depreciation expense claimed by an entity (as a taxpayer) on a tax return as a compensation for the loss in the value of its assets utilized in income-generation processes. Similar to accounting depreciation, tax depreciation involves the allocation of depreciation expenses over multiple intervals. Accordingly, the tax values of depreciable assets gradually decrease (by the amount of depreciation expense) over their useful lives.
Tax depreciation is calculated from the date the assets are put into use (in an entity’s income-generating activities) until the date of disposal or write-off.
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