I do NOT understand depreciation. Can somebody help me? I need it explained like a 5 year old.

[quaker bill]

18. I run an isolated total cash business

I have been doing so for 5 years now. I make jewelry, after my day job. I started with a simple set of hand tools that I bought for an apprenticeship in High School, and a stone cutting machine my parents bought me in middle school, all quite some time ago

Starting from that simple point, I have now sold many thousands of dollars of jewelry. A very large portion of the dollars I have made have been spent to equip a real 1940's style jewelers production studio. In short I have purchased a variety of hand operated equipment with the dollars. All of it has been bought to allow me to incorporate a greater range of techniques into my body of work and to allow me to recycle precious metal scrap into new pieces.

In 5 years, I have only paid myself only once ($500). Every other dime has gone into materials and equipment. The way I can expense out the investment of making the business fly entirely off of sweat equity, is to depreciate the equipment against sales. This way I get to claim that in fact I have only pocketed $500. Since depreciation is accelerated, I will expense out all the equipment in 3 to 5 years, after which profits will be taxed fully as the equipment will have been "paid for".

It would make more sense to me to be able to just deduct the full equipment cost from profit the year that I spend the money, but that is not how it is done.