Depreciation Calculator
Calculate asset depreciation using multiple methods with full schedules and tax insights
Depreciation Formulas
Understanding Asset Depreciation
Depreciation is an accounting method that allocates the cost of a tangible asset over its useful life. It reflects the gradual consumption of an asset's economic value as it ages, wears out, or becomes obsolete. Understanding depreciation is essential for accurate financial reporting, tax planning, and business decision-making.
When a business purchases equipment, vehicles, buildings, or other long-term assets, it cannot deduct the entire cost in the year of purchase. Instead, the cost is spread over multiple years through depreciation expense. This matching principle aligns the expense recognition with the revenue the asset helps generate.
Depreciation affects both the income statement (as an expense that reduces profit) and the balance sheet (as accumulated depreciation that reduces asset value). It's a non-cash expense, meaning it doesn't involve actual cash outflow but still provides tax benefits.
Depreciation Methods Compared
Straight-Line
Equal depreciation each year. Simplest method, best for assets with consistent utility over time.
Declining Balance
Higher depreciation early, lower later. Matches assets that lose value quickly initially.
Double Declining
Accelerated method using 200% of straight-line rate. Popular for tax purposes.
Sum of Years' Digits
Accelerated method with smoothly decreasing depreciation. Middle ground approach.
Common Asset Useful Lives (IRS Guidelines)
The IRS provides guidelines for asset useful lives under the Modified Accelerated Cost Recovery System (MACRS). These recovery periods affect how quickly you can depreciate assets for tax purposes.
| Asset Type | MACRS Class | Useful Life | Common Examples |
|---|---|---|---|
| Automobiles | 5-year | 5 years | Cars, light trucks, computers |
| Office Equipment | 5-year | 5 years | Computers, printers, phones |
| Office Furniture | 7-year | 7 years | Desks, chairs, cabinets |
| Heavy Equipment | 7-year | 7 years | Manufacturing equipment |
| Land Improvements | 15-year | 15 years | Parking lots, landscaping |
| Residential Rental | 27.5-year | 27.5 years | Rental houses, apartments |
| Commercial Buildings | 39-year | 39 years | Office buildings, warehouses |
| Restaurant Equipment | 7-year | 7 years | Kitchen equipment, fixtures |
Choosing the Right Method
For Financial Reporting
Straight-line is most common for GAAP reporting. It provides predictable, consistent expense recognition across periods.
For Tax Benefits
Accelerated methods (MACRS, declining balance) maximize early-year deductions, providing better time value of tax savings.
For Vehicles & Tech
Use declining balance methods. These assets lose value quickly in early years due to wear and obsolescence.
For Buildings
Straight-line is required for real property. Buildings depreciate slowly and consistently over decades.
Frequently Asked Questions
What's the difference between depreciation and amortization?
Depreciation applies to tangible assets (equipment, buildings, vehicles). Amortization applies to intangible assets (patents, copyrights, goodwill). Both spread cost over useful life, but use different terminology.
Can I depreciate land?
No. Land is not depreciable because it has an indefinite useful life and doesn't wear out or become obsolete. Only land improvements (parking lots, landscaping) can be depreciated.
What is salvage value?
Salvage (or residual) value is the estimated amount an asset will be worth at the end of its useful life. It's subtracted from cost to determine the depreciable amount. Many companies estimate zero salvage for simplicity.
Can I change depreciation methods?
Changing methods requires justification and may need IRS approval for tax purposes. For financial reporting, changes must be disclosed and may require restatement of prior periods under certain accounting standards.
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