What is the primary purpose of depreciation?

The primary purpose of depreciation is to reduce taxable income. This accounting method allows businesses to allocate the cost of tangible assets over their useful lives rather than expensing the entire amount in the year of purchase. By spreading out the cost, businesses can lower their taxable income in each year during which the asset is depreciated. This tax deduction leads to a lower tax liability, providing a financial incentive for investing in long-term assets.

While there are other concepts associated with depreciation, such as reflecting the decline in value of an asset over time or providing a more accurate picture of profit margins, the primary goal in the context of federal taxation is to manage income taxes more effectively. Reducing taxable income through depreciation helps businesses conserve cash flow and invest in growth or operational needs.