An asset is depreciated when part or all of its cost has already been charged to expense across the periods the asset is used, so the amount carried for it is cost less accumulated depreciation. Depreciation is that charge itself, the periodic allocation of a depreciable asset’s cost, less any salvage value, over the time the asset serves the business. Neither sense says what the asset would sell for today.
An asset can be fully depreciated and still be in service, and a single asset may carry two depreciated amounts at once, one on the books and one for tax.
Where the Allowance Comes From
The deduction is statutory. There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear, including a reasonable allowance for obsolescence, of property used in the trade or business, or of property held for the production of income (26 U.S.C. 167(a)). The two limbs are alternatives, so income-producing property qualifies without being used in a trade or business.
The regulation describes an allocation rather than a valuation: the allowance is the amount set aside for the taxable year under a reasonably consistent plan, so that the amounts set aside plus salvage value equal the cost or other basis at the end of the estimated useful life (26 CFR 1.167(a)-1(a)). Which method does the allocating, and over how long, is set by section 168 for most tangible property placed in service today (26 U.S.C. 168(a)), and straight line is one of the methods it assigns, worked through in straight line depreciation.
Where a Depreciated Asset Lands in a Firm’s Work
On the books the journal entry has two halves, a depreciation charge and the same amount added to accumulated depreciation, the contra account described in fixed assets. For an asset used in administration or selling that charge is an expense of the period. For an asset used in production it becomes part of the cost of what is produced, so it reaches income as cost of goods sold when those goods are sold.
On the return the deduction reaches Form 4562, Depreciation and Amortization, only when that form is required for the year. A corporation filing anything other than Form 1120-S attaches it for any depreciation at all. A return whose only depreciation for the year runs on property placed in service in an earlier year does not have to file the form, unless that property is listed property, meaning vehicles and other assets that lend themselves to personal use, or the return also claims a section 179 deduction or amortization beginning this year (IRS, Instructions for Form 4562, 2025).
Where the form is filed, an asset depreciated in earlier years under section 168 reports on line 17, the line for assets placed in service in tax years beginning before 2025 (IRS, Form 4562, 2025).
Depreciated Does Not Mean Worth Less
The regulation closes the valuation reading in one sentence: the allowance shall not reflect amounts representing a mere reduction in market value (26 CFR 1.167(a)-1(a)). It spreads a cost already spent, so it runs whether the asset’s resale price moves or not. In ordinary English the verb does mean to fall in value, which is where the confusion starts. The accounting and tax senses track cost already spent, not price.
Depreciation begins when the property is placed in service and stops either when the cost or other basis has been fully recovered or when the property is retired from service, whichever happens first (IRS, Publication 946, 2025). Property that reaches the first of those has no depreciation left to take, which says nothing about whether it still runs, and selling it is where depreciation recapture begins.
Book Depreciated and Tax Depreciated Are Two Different Numbers
The corporate return shows the split on its face. Schedule M-1 of Form 1120 reconciles income per books with income per return, and depreciation is the first named item on both sides of it, at line 5 for expenses recorded on books this year not deducted on this return and at line 8 for deductions on this return not charged against book income this year (IRS, Form 1120, 2025). So when a client calls an asset depreciated, the question worth asking is which set of books they mean.
What Is the Difference Between Deprecated and Depreciated?
They are unrelated words. Deprecated is the word software uses for a feature that still works for now but is flagged for removal in a later version, and it carries no meaning about cost or basis. The two get swapped because they sound alike, not because they overlap.
Firms that lose close time deciding which depreciation figure belongs on the books and which belongs on the return can run a block of that work through Accountably’s trial task first.
