Depreciation Calculator
Calculate asset depreciation using straight-line, declining balance, or sum-of-years-digits methods. Includes depreciation schedule table. Free online calculator.
What Is Depreciation?
Depreciation is the systematic allocation of an asset's cost over its useful life. Rather than expensing the full cost of a long-lived asset in the year of purchase, businesses spread the cost across the years the asset is used. This matches expenses with the revenues the asset helps generate — a core principle of accrual accounting.
Three key concepts define depreciation calculations:
- Cost basis: The original purchase price plus any additional costs to put the asset in service (installation, delivery, taxes).
- Salvage value: The estimated residual value at the end of the asset's useful life. An asset is depreciated down to its salvage value, not to zero (unless salvage value is $0).
- Useful life: The estimated period the asset will be productive. IRS has standardized recovery periods for tax depreciation (e.g., 5-year property for cars, 7-year for machinery, 39-year for commercial real estate).
Straight-Line Depreciation Method
Straight-line is the simplest and most common depreciation method. It spreads the cost evenly over the asset's useful life.
Formula: Annual Depreciation = (Cost − Salvage Value) / Useful Life
Example: Equipment costing $50,000 with a $5,000 salvage value and 5-year useful life:
- Annual Depreciation = ($50,000 − $5,000) / 5 = $9,000/year
- Depreciation Rate = $9,000 / $50,000 = 18% per year
| Year | Depreciation | Accumulated | Book Value |
|---|---|---|---|
| 1 | $9,000 | $9,000 | $41,000 |
| 2 | $9,000 | $18,000 | $32,000 |
| 3 | $9,000 | $27,000 | $23,000 |
| 4 | $9,000 | $36,000 | $14,000 |
| 5 | $9,000 | $45,000 | $5,000 |
Best for: Assets that provide consistent value throughout their life — office furniture, buildings, patents.
Double Declining Balance (Accelerated Depreciation)
The Double Declining Balance (DDB) method depreciates assets faster in early years and slower in later years. This better matches assets that lose value quickly (vehicles, computers, technology).
Formula: Annual Depreciation = 2 × (1/Useful Life) × Beginning Book Value
Example: Same $50,000 asset, $5,000 salvage, 5 years:
- DDB Rate = 2 × (1/5) = 40% per year
- Year 1: 40% × $50,000 = $20,000
- Year 2: 40% × $30,000 = $12,000
- Year 3: 40% × $18,000 = $7,200
- Year 4: 40% × $10,800 = $4,320 (stops if book value would drop below salvage)
- Year 5: Remainder to salvage = $1,480
DDB front-loads depreciation, creating larger deductions in early years — beneficial for tax purposes.
Sum-of-Years-Digits Method
Sum-of-Years-Digits (SYD) is another accelerated method that is smoother than DDB:
SYD = Useful Life × (Useful Life + 1) / 2
For a 5-year asset: SYD = 5 × 6 / 2 = 15
Each year's depreciation fraction: Year 1 = 5/15, Year 2 = 4/15, Year 3 = 3/15, Year 4 = 2/15, Year 5 = 1/15
Annual Depreciation = (Remaining Life / SYD) × (Cost − Salvage)
Year 1: (5/15) × ($50,000 − $5,000) = 0.333 × $45,000 = $15,000
MACRS: IRS Tax Depreciation
For US federal tax purposes, most businesses use MACRS (Modified Accelerated Cost Recovery System), which differs from book depreciation:
| Asset Class | Recovery Period | Examples |
|---|---|---|
| 3-year property | 3 years | Racehorses, tractor units |
| 5-year property | 5 years | Cars, light trucks, computers, office machinery |
| 7-year property | 7 years | Office furniture, most manufacturing equipment |
| 10-year property | 10 years | Water transportation, fruit/nut trees |
| 15-year property | 15 years | Land improvements, retail spaces, restaurants |
| 27.5-year property | 27.5 years | Residential rental property |
| 39-year property | 39 years | Commercial real estate (non-residential) |
Section 179 deduction allows immediate expensing of up to $1,160,000 (2023 limit) of qualifying property in the year of purchase. Bonus depreciation allows an additional 60% (2024) first-year deduction on eligible property. These accelerate tax benefits significantly.
Book Depreciation vs. Tax Depreciation
Many companies use different depreciation methods for financial reporting (book) vs. tax purposes — this is legal and common:
- Book depreciation: Follows GAAP; typically straight-line for consistent financial reporting. Goal: accurately match expenses to revenues.
- Tax depreciation: Follows IRS rules (MACRS + Section 179 + bonus depreciation); accelerated to minimize current-year taxes.
- Deferred tax liability: When tax depreciation exceeds book depreciation, the company pays less tax now but more later. This creates a deferred tax liability on the balance sheet.
The gap between book and tax depreciation is why a company's financial statements may show more profit than its tax return, or why a profitable company might pay little corporate tax in high-investment years.
Frequently Asked Questions
What is straight-line depreciation?
Straight-line depreciation divides the depreciable cost (cost minus salvage value) equally across the asset's useful life. It is the simplest method: Annual Depreciation = (Cost − Salvage Value) / Useful Life. A $10,000 asset with $1,000 salvage value over 5 years depreciates $1,800/year.
How do I calculate depreciation for a car?
For tax purposes, use MACRS 5-year schedule. For financial reporting, straight-line is common. New cars lose approximately 15–25% of value in the first year, and 10–15% per year after — much faster than a typical 5-year straight-line schedule. The IRS also has luxury auto limits that cap annual deductions for vehicles used in business.
What is the difference between depreciation and amortization?
Depreciation applies to tangible assets (physical things: equipment, vehicles, buildings). Amortization applies to intangible assets (non-physical: patents, trademarks, software licenses, goodwill). Both systematically allocate cost over time; the math is often identical, but the terminology differs by asset type.
What is accumulated depreciation?
Accumulated depreciation is the total depreciation charged against an asset since it was acquired. It is a contra-asset account on the balance sheet. Book value = Original Cost − Accumulated Depreciation. When an asset is fully depreciated, its book value equals its salvage value (or zero if no salvage value).
How long do you depreciate a building?
Under MACRS: Residential rental property = 27.5 years. Commercial (non-residential) real estate = 39 years. Land is NOT depreciated — only the building. You must allocate the purchase price between land (non-depreciable) and building (depreciable), typically based on the county tax assessment ratio.
What is a depreciation schedule?
A depreciation schedule is a table showing each year's depreciation amount, accumulated depreciation, and remaining book value over the asset's entire life. It is used for bookkeeping, tax preparation, and financial reporting. Fixed asset management software typically generates these automatically.
Can you depreciate an asset below zero?
No. An asset cannot be depreciated below its salvage value. Once book value reaches salvage value, depreciation stops — even if the asset is still in use. If an asset becomes worthless (fully impaired), it can be written off, but that is an impairment charge, not depreciation.
What is bonus depreciation?
Bonus depreciation (Section 168(k)) allows businesses to deduct a large percentage of eligible property cost in the first year. It was 100% (full expensing) from 2017–2022, phasing down to 60% in 2024, 40% in 2025, 20% in 2026. Unlike Section 179, it applies even if the business has a net loss.
What assets cannot be depreciated?
Assets that cannot be depreciated: (1) Land — does not wear out or become obsolete; (2) Personal-use property — only business assets qualify; (3) Inventory — treated as cost of goods sold, not depreciated; (4) Investments (stocks, bonds); (5) Assets fully expensed in year of purchase via Section 179 or bonus depreciation.
What is the half-year convention in MACRS?
MACRS assumes all assets are placed in service at the midpoint of the year (half-year convention), so you only get half a year of depreciation in year 1 and half a year in the final year. For example, 5-year MACRS property actually has deductions spread over 6 tax years. A mid-quarter convention applies if more than 40% of assets are placed in service in the last quarter.