What is "depreciation" in the context of corporate tax?

In the context of corporate tax, depreciation refers to a method used to allocate the cost of a tangible asset over its useful life. This process is crucial for businesses as it allows them to match the expense of an asset against the revenue it generates over time. By doing so, companies can reflect the gradual wear and tear or obsolescence of the asset, which provides a more accurate picture of financial performance.

For tax purposes, depreciation reduces taxable income, as it is recognized as an expense. This deduction can significantly impact a corporation's tax liability, making it an essential aspect of corporate tax strategy. Various methods of calculating depreciation, such as straight-line or declining balance, can be used, and the choice of method can influence the timing and amount of tax deductions.

Understanding depreciation is vital for corporations to manage their finances effectively and comply with tax regulations, as it plays a key role in the overall financial reporting and tax planning process.