What depreciation is
When a business buys equipment, a vehicle or a machine that will last several years, it does not count the whole cost as an expense in the year of purchase. Instead, it spreads the cost over the asset’s useful life through depreciation. Each year’s depreciation reduces profit and the asset’s book value on the balance sheet.
Straight-line depreciation
The simplest method spreads the cost evenly:
annual depreciation = (cost − salvage value) ÷ useful life
Declining balance depreciation
Accelerated methods take more depreciation in the early years, which better matches assets that lose value quickly, such as computers or vehicles. Double-declining balance (DDB) applies twice the straight-line rate to the remaining book value each year:
rate = 2 ÷ useful life, and depreciation = book value at the start of the year × rate
Because a declining balance never reaches zero on its own, the method switches to straight-line in the year when spreading the remaining value evenly gives a larger amount. The calculator shows that switch year. Its declining balance figures ignore the salvage value and depreciate the asset to zero.
Worked example
A $10,000 asset with a 5-year life and a $1,000 salvage value:
| Year | Straight-line | Book value | Double-declining | Book value |
|---|---|---|---|---|
| 1 | $1,800 | $8,200 | $4,000 | $6,000 |
| 2 | $1,800 | $6,400 | $2,400 | $3,600 |
| 3 | $1,800 | $4,600 | $1,440 | $2,160 |
| 4 | $1,800 | $2,800 | $1,080 | $1,080 |
| 5 | $1,800 | $1,000 | $1,080 | $0 |
The DDB rate is 40%, and the switch to straight-line comes in year 4.
Which method to use?
- Straight-line is simple and common in financial statements.
- Declining balance front-loads expenses, which lowers taxable income in the early years in tax systems that allow it.
- The 150% declining balance method is a gentler version, at 1.5 times the straight-line rate.
Taxes in the United States
For US federal taxes, most business property is depreciated with MACRS, which uses IRS tables, set recovery periods (for example 5 years for computers and cars, 7 years for office furniture) and a half-year or mid-quarter convention. Section 179 expensing and bonus depreciation can allow much of the cost to be deducted in the first year. This calculator illustrates the methods; use IRS Publication 946 or tax software for your return.
This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.