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

[customerserviceguy]

40. It recognizes the difference between things bought for investment and things bought for consumption

The "ordinary" people you allude to spend most of their money on consumption. When they actually invest in something, they get to consider its cost basis in calculating profit and loss, and the tax code reflects that, too. In fact, the investment in a principal personal residence is one of the most tax-favored investments under the entire tax code. Not only do you get to shield up to $250K of profit every two years (double that for a married couple) you also get to deduct from taxable income the real estate taxes and mortgage interest which finance it.

Now, there are plenty of "consumption" expenses that are at least partially allowable to businesses (travel and entertainment being chief among them), but the tax code is more often than not set up to recognize deductions for legitimate expenses incurred in producing income for the most part.

There's a basic fairness in that. Let's say that you have two people, an author who brings in $1 million from writing books, and a business owner who grosses the same million from his/her activities. The author would have very minimal expenses in producing that million, but if the business owner spends $900 K on goods for resale and wages for employees, isn't it fair to tax the latter on only the $100 K realized?