There are several reasons for spreading out the cost of an asset purchase over multiple years:
– The accounting principle of “matching revenue to expenses”. For example, office workers cannot perform their jobs without a functioning computer. No computer, no work, no money coming in the door. You need to offset the revenue with the matching expense to show the real cost of bringing in that money. Otherwise your profit is artificially inflated. By pretending you didn’t pay for the computer, your profit is too high.
– The old-fashioned concept of saving for a purchase in advance. Accounting theory is old and pre-dates credit cards. In the past, if a company needed to buy a piece of equipment, they had to save up and pay cash. Using this lens, the annual depreciation method forces you to save back the money you already spent. For technology, the depreciation time is three years. If you were profitable each year, you have saved back the amount you expensed for the computer. The depreciation expense is putting cash back into your bank account, without you having to think about it. When it is time to buy a new computer, the money is already saved for the purchase!
– Smoothing out expenses for tax payment purposes. In a for-profit or solo-owned business (Schedule C), you pay tax on your annual profit. If you deduct $2,100 in expenses for an awesome new graphics computer in Year 1, then your tax payment is lower in Year 1. In Year 2, your taxes are higher, since you lack that expense to offset revenue. The idea is to help businesses with long-term planning and controlling rapid jumps in taxes owed.