DEPRECIATION

Economists use the term depreciation to refer to the loss of economic value suffered by business assets and equipment, consumer goods, and currency as time passes. The most common use of depreciation in economics is in business tax law. The Internal Revenue Service (IRS) allows businesses to lower the amount of taxes they owe by counting as a business expense the total depreciation of aging equipment and assets over the previous year. For example, if a business bought a photocopier in March, by December it will have declined in value by some amount. To claim this depreciation in value as an expense, the business must first determine the average "life span" of the photocopier, so it will know what percentage of the photocopier's total value has eroded in the past year. The two most common methods for determining how much assets have depreciated were the "straight-line" method and the "declining-balance" or "declining-charge" method.

During World War II (1939–1945), the U.S. government began to allow businesses to "accelerate" the depreciating value of their assets. For example, rather than telling businesses that typewriters had a "life span" of seven years, the IRS allowed businesses to claim that typewriters had a useful life of, say, five years. This meant that businesses could enjoy the tax savings they gained from the declining value of their typewriters in five years rather seven. Speeding up the depreciation of a company's assets in this way gave businesses more money in the short term to invest in expansion and new equipment. Among the first legislation of President Ronald Reagan's (1981–1989) administration was the Economic Recovery Tax Act of 1981, which attempted to encourage companies to expand by shortening the standard five-year depreciation for business assets to three years.

The term depreciation also referred to the decline in value of one currency against another. If one U.S. dollar bought 1.5 German marks one year but only 1.4 marks the next year, the dollar "depreciated" against the mark.

See also: Appreciation