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The term depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life. Depreciation represents how much of an asset's value has been used. It allows companies to earn revenue from the assets they own by paying for them over a certain period of time.

Because companies don't have to account for them entirely in the year the assets are purchased, the immediate cost of ownership is significantly reduced. Not accounting for depreciation can greatly affect a company's profits. Companies can also depreciate long-term assets for both tax and accounting purposes.

Depreciation can be compared with amortization, which accounts for the change in value over time of intangible assets.

Depreciation is the decline in the total value of a piece of property. It should be noted that depreciation can only occur to the building itself and not the property the building is located on. According to tax laws, residential properties must be depreciated over a 27.5 year term, and commercial property must be depreciated over a 39 year term. It can be used as an income tax deduction for businesses when filing an annual tax report with the Internal Revenue Service. The IRS gives an allowance to a business for the normal wear and tear of a piece of property as long as the individual that files owns the property, uses the space for an income producing activity, and has a continued useful life of at least one year.

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