Depreciation Calculator

Depreciation

In everyday use, depreciation means something losing value as it ages or wears out: a car is worth less each year, and a laptop becomes outdated. In accounting, the word has a narrower meaning. It is the method of spreading the cost of a long-lived asset, such as machinery, vehicles, buildings or computers, over the years it helps produce revenue. Instead of recording a $50,000 truck as a single expense in the year it is bought, a business records part of the cost each year of its useful life. This matches costs to the periods that benefit from them and keeps profits from swinging wildly in years with big purchases.

Depreciation is a non-cash expense: no money leaves the business when it is recorded. It reduces reported profit and, for tax purposes, taxable income. In the US, the IRS generally requires business property to be depreciated under the Modified Accelerated Cost Recovery System (MACRS), which sets recovery periods by asset class, while financial statements often use one of the methods below. Land is never depreciated.

Methods of Depreciation

Every method depreciates the same total, cost minus salvage value. They differ only in timing: straight line spreads it evenly, while accelerated methods take more in the early years when an asset is newest and most productive. The examples below use this page's defaults: an $11,000 asset with a $1,000 salvage value and a five-year life.

Straight line: D = (Cost − Salvage) ÷ Life

Declining balance

D = Book value × Factor ÷ Life, never below salvage

Sum of the years' digits

D = (Cost − Salvage) × Remaining life ÷ [Life × (Life + 1) ÷ 2]

Units of production

D = (Cost − Salvage) × Units this year ÷ Total expected units

Straight-Line Depreciation Method

The simplest and most widely used method charges the same amount every year. ($11,000 − $1,000) ÷ 5 = $2,000 a year, or 20% of the depreciable base.

Declining Balance Depreciation Method

Declining balance applies a fixed percentage to the asset's remaining book value each year, so the charge is largest at the start and shrinks over time. The percentage is the straight-line rate multiplied by a factor: with a factor of 2, called double declining balance, a five-year asset is depreciated at 2 ÷ 5 = 40% a year. A factor of 1.5 gives the 150% declining balance method used for some MACRS property.

Salvage value is not subtracted before applying the rate, but depreciation stops once book value reaches salvage. Because a percentage of a balance never reaches a fixed floor exactly, the last year is set to whatever amount brings the book value down to salvage. Many businesses instead switch to straight line once that gives a larger deduction, which is how MACRS tables are built.

Sum of the Years' Digits Depreciation Method

This accelerated method weights each year by the number of years remaining. For a five-year life, the digits 5 + 4 + 3 + 2 + 1 add up to 15, so the first year takes 5/15 of the depreciable base, the second 4/15, and so on down to 1/15.

Units of Production Depreciation Method

Here depreciation follows use rather than time. Divide the depreciable base by the total units the asset is expected to produce, such as miles, hours or parts, and charge that rate for each unit used. If the $11,000 machine is expected to make 50,000 parts, it depreciates $0.20 per part.

Partial Year Depreciation

Assets are rarely bought on the first day of the accounting year. A partial-year convention decides how much of the first year's depreciation to take; the remainder spills into one extra year at the end. Counting every day prorates by the exact number of days in service. The half-month convention treats an asset placed in service in the first half of a month as in service all month, and one placed in the second half as starting the next month. The full-month convention counts the whole starting month. The half-quarter and full-quarter conventions do the same by quarter, and the half-year convention, the MACRS default, assumes every asset is placed in service mid-year.

Salvage Value

Salvage value, also called residual or scrap value, is what you expect to get for an asset when you are finished with it, whether by selling it, trading it in or scrapping it for parts. It is an estimate, often based on resale prices for similar used equipment. Depreciation covers only cost minus salvage, because that is the value actually used up. Under MACRS for US tax purposes, salvage value is treated as zero, so the full cost is recovered. If you later sell an asset for more than its book value, the gain may be taxed as depreciation recapture.

Frequently asked questions

Sources

• IRS Publication 946 – How To Depreciate Property
• IRS – Topic No. 704, Depreciation