Basic Depreciation

Income Tax Basics

Gross Income (GI) : The total of all income from revenue producing sources.

Operating Expenses (E) : All the costs incurred by a corporation in transaction of its 

Taxable Income (TI) : The amount upon which taxes are calculated.

               TI = GI - E -Depreciation

Tax Rate : A % of TI owed in taxes.

                    Corporate                                                             Personal

GI = Business Revenue + Other Income              GI=Salaries & wages + Interest &  dividends                                                                                                                  + Other Income
TI = Gross Income-Operating Expenses              TI = Gross Income-Personal Exemption-
                             -Depreciation                                    Standard Itemized Deductions
Tax = TI (Tax Rate)                                             Tax = TI (Tax Rate)

We are concerned with corporate tax ramifications in this class. The higher the operating expenses and depreciation, the lower the corporate taxes.

So, what is depreciation?


The accounting for a reduction in value of an asset due to age, wear and obsolescence.

Over its life


Several Depreciation Methods

Here is what would happen in our example when the depreciation schedule is calculated.

           BVt                 Dt              Depreciation Allowed 
0        80,000                 -                             -
1        53,333            26,667                    26,667
2        35,555            17,777                    17,777
3        23,703            11,852                    11,852
4        15,802              7,901          23,703-20,000 = $3,703
5        10,535              5,267                            0
6          7,023              3,512                            0

It is rare that the SV is known for the end of an asset's life. We will see what happens for the usual case in the next lesson.

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Added to the Web: May 20, 2002.
Last updated: April 26, 2002.
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