What is Depreciation?
The accounting method for spreading the cost of a long-term tangible asset over its useful life.
Definition
Depreciation is the systematic allocation of the cost of a tangible long-term asset over its estimated useful life. Instead of recording the full purchase price of an asset as an expense in the year it was bought, depreciation spreads that cost across multiple years — matching the expense with the periods in which the asset generates revenue. For freelancers, depreciation is most relevant for significant business purchases such as computers, equipment, software, and vehicles.
Why Depreciation Matters for Freelancers
When you buy a $3,000 laptop for freelance work, it would distort your profit and loss if you recorded the full $3,000 as an expense in the month of purchase. Depreciation lets you spread that cost across the laptop's useful life (typically 3–5 years for computers), giving a more accurate picture of profitability each year. It also has significant tax implications: the IRS allows deductions for depreciation, reducing taxable income over time rather than in a single year.
Common Depreciation Methods
The straight-line method divides the cost of the asset evenly over its useful life — if a $3,000 computer has a 3-year life, you depreciate $1,000 per year. The declining balance method accelerates depreciation — taking larger deductions in early years and smaller ones later (common for assets that lose value quickly). The Modified Accelerated Cost Recovery System (MACRS) is the IRS-prescribed depreciation system for tax purposes, with specific recovery periods for different asset categories.
Section 179: Immediate Expensing
Section 179 of the US tax code allows businesses to deduct the full purchase price of qualifying equipment in the year it is purchased rather than depreciating it over time — effectively making it an immediate expense rather than a depreciated asset. This is valuable for freelancers making significant equipment purchases. The annual limit changes; check current IRS guidelines. Not all assets qualify (land, for example, cannot be depreciated), and there are phase-out thresholds for total annual purchases.
Recording Depreciation
At the end of each accounting period, you record depreciation as a debit to depreciation expense and a credit to accumulated depreciation (a contra-asset account that reduces the book value of the asset on your balance sheet). The asset's book value on the balance sheet is its original cost minus accumulated depreciation. When the asset is fully depreciated, it still appears on the books at its salvage value — what you expect to receive when you dispose of it.