Depreciation deductions are different than normal deductions. A depreciation deduction is subject to recapture in future years which can be offset by the income the asset generates.
However, depreciation deductions and tax credits work together. Depreciation reduces the taxable income owed by an individual (reducing Adjusted Gross Income). Then a tax credit can be applied to reduce the tax liability even further. Tax credits are applied dollar for dollar against the taxes that are due on the reduced income.
Depreciation deductions reduces adjusted gross income, therefore reducing the amount of taxes owed on that lowered income.
A Depreciation deduction is a cost recovery method that allows a taxpayer to deduct the cost of an asset over a specified period of time. The depreciation deduction reduces the amount of taxable income that is subject to taxation.
The value and economic benefit of the depreciation deduction is affected by the taxpayer's tax bracket. The higher the taxpayer's tax bracket, the higher the economic benefit from the depreciation deduction.
A tax credit is a credit that is used as a non-cash form of payment or dollar for dollar offset of income taxes owed by a taxpayer. Specific sections of the Internal Revenue Code provide for the allocation of tax credits to a taxpayer.
Internal Revenue Code 38 through 50 define many different qualifying assets and activities which are eligible for an allocation of tax credits. Tax credits are the result of a qualifying equity allocation into a specific qualifying asset or activity, and are considered to be an incentive offered by Congress for making that purchase. The amount of the tax credit received is usually a percentage of the cost of the qualifying acquisition made by the taxpayer.
Tax credits directly reduce Tax Liability on a dollar for dollar basis.
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