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

[csziggy]

21. It's all a tax dodge but it is how it's done

In my case for the farm, say I put $10,000 in new fencing. That fence will last 10 years (arbitrary number for illustration only - there are tables for different kinds of equipment and facilities). Instead of writing off the entire cost of the fence the first year as an expense, it depreciates $1000 per year over the ten year expected lifetime.

Another way to look at it is that when you invest in equipment or livestock, it loses value over time. If I buy a herd of young cows, they will not be worth as much in five years when they are older. So the original investment value of the herd is reduced over time as depreciation. The offspring of the cows are handled differently in the tax code - unless I keep the heifers to replace their aging mothers. Then the heifers can be depreciated as they age.

Investors can write off investment losses over a number of years by carrying losses forward and using them to write off future income. Depreciation lets regular businesses write off major investments in equipment against future income. Same deal.