Depreciation Calculator

FAQ

What is depreciation?

Depreciation is the accounting method of allocating the cost of a tangible asset over its useful life, representing the decline in value over time. It is a non-cash expense recorded on the income statement each period, reducing the asset's book value on the balance sheet. Depreciation applies to buildings, machinery, vehicles, and equipment — but not land.

What is straight-line depreciation?

Straight-line depreciation spreads the cost evenly over the asset's life. Annual depreciation = (Cost − Salvage Value) ÷ Useful Life. It is the simplest and most widely used method, ideal for assets that lose value at a constant rate, such as buildings and furniture. The same dollar amount is expensed each year until the book value reaches salvage value.

What is declining balance depreciation?

Declining balance (accelerated) depreciation applies a fixed percentage to the asset's remaining book value each year. Since the book value decreases each year, so does the depreciation amount. The double-declining balance (DDB) method uses twice the straight-line rate. Example: a 5-year asset has a 20% straight-line rate, so DDB uses 40% of the book value each year, front-loading deductions.

What is MACRS depreciation?

MACRS (Modified Accelerated Cost Recovery System) is the standard depreciation system required by the IRS for U.S. tax purposes. It assigns assets to recovery classes: 5 years (computers, vehicles), 7 years (office furniture), 27.5 years (residential rental), 39 years (commercial buildings). MACRS uses accelerated rates in early years, giving larger tax deductions sooner.

When should I use straight-line vs declining balance?

Use straight-line when the asset provides consistent value over time (buildings, furniture, fixtures) or when you want predictable, equal annual expenses. Use declining balance for assets that lose value quickly in early years (computers, vehicles, technology). Declining balance delivers larger tax deductions earlier, improving cash flow — but total depreciation over the asset's life is the same for both methods.

Does depreciation affect taxes?

Yes. Depreciation is a tax-deductible non-cash expense. Each year's depreciation reduces taxable income, lowering income tax owed. For example, $10,000 annual depreciation at a 25% tax rate saves $2,500 in taxes per year. The IRS also allows bonus depreciation (100% in qualifying years) and Section 179 to immediately deduct the full cost of qualifying assets.

What is Section 179 expensing?

Section 179 of the U.S. tax code lets businesses immediately deduct the full cost of qualifying equipment and software in the year of purchase, rather than depreciating it over years. The 2024 Section 179 limit is $1,220,000 (phased out above $3,050,000 in total purchases). Unlike regular depreciation, Section 179 can only be used up to the business's taxable income — it cannot create a loss.

What assets can be depreciated?

Tangible fixed assets used in business operations can be depreciated: machinery, vehicles, computers, furniture, and buildings. Land cannot be depreciated because it does not wear out or become obsolete. Intangible assets (patents, software, trademarks) are amortized using similar methods. Personal-use assets and inventory are not eligible for business depreciation.

What is salvage value and how do I estimate it?

Salvage value (residual or scrap value) is the estimated value of the asset at the end of its useful life. For most computers and office equipment, salvage value is $0. For vehicles, estimate 10–20% of original cost. For specialized machinery, check secondary market prices for comparable used equipment. Only the depreciable amount (Cost − Salvage Value) is written off over the asset's life.

What is the useful life of common business assets?

IRS MACRS guidelines: computers and technology — 5 years; vehicles — 5 years; office furniture and fixtures — 7 years; agricultural equipment — 7 years; land improvements — 15 years; residential rental property — 27.5 years; commercial buildings — 39 years. The economic useful life may differ from the tax life — a computer may be replaced in 3 years but depreciated over 5 for tax purposes.

What is partial-year depreciation?

When you acquire an asset mid-year, you only depreciate it for the portion of the year it was in service. The IRS half-year convention assumes all assets are placed in service at mid-year, giving half a year of depreciation in the first and last years regardless of the actual purchase date. If more than 40% of assets are placed in service in Q4, the mid-quarter convention applies instead.

What is the difference between book and tax depreciation?

Book depreciation (GAAP) is used for financial reporting and reflects economic reality — typically straight-line over the actual useful life. Tax depreciation follows IRS rules (MACRS) and is often accelerated to minimize current taxes. These two methods frequently diverge, creating temporary differences that appear as deferred tax liabilities or assets on the balance sheet.

What is the difference between depreciation and impairment?

Depreciation is the planned, systematic allocation of an asset's cost over its useful life — expected and scheduled from day one. Impairment is an unplanned, sudden reduction in value due to physical damage, obsolescence, or adverse market changes. Impairment is recognized immediately when the carrying value exceeds the recoverable amount; regular depreciation continues on its normal schedule.

Can leased assets be depreciated?

Under an operating lease, the lessee does not own the asset and cannot depreciate it — only the lessor can. Under a finance lease (capital lease), the lessee records a right-of-use asset on their balance sheet and depreciates it over the shorter of the lease term or the asset's useful life. Since ASC 842 (US) and IFRS 16, most leases must be recognized on the balance sheet.

What is sum-of-years-digits depreciation?

Sum-of-years-digits (SYD) is an accelerated method where higher depreciation is charged in the early years. Each year's fraction is: Remaining Useful Life ÷ Sum of All Years' Digits. For a 5-year asset, the sum = 1+2+3+4+5 = 15. Year 1 uses 5/15 = 33.3%, Year 2 uses 4/15 = 26.7%, and so on. SYD is less aggressive than double-declining balance but more accelerated than straight-line.

How do I depreciate a company car or business vehicle?

Business vehicles fall under the IRS MACRS 5-year property class. A $40,000 company car with $8,000 salvage value depreciates at ($40,000 − $8,000) ÷ 5 = $6,400/year straight-line. Under MACRS, the first-year deduction is higher (20% × $40,000 = $8,000). Passenger vehicles are subject to annual luxury limits ($20,200 in year 1 for 2024). Heavy SUVs and trucks over 6,000 lbs GVWR are exempt from these limits, making them popular for Section 179 deductions up to $1.16 million.

What is bonus depreciation and how does it work in 2025–2026?

Bonus depreciation allows businesses to deduct a large percentage of an asset's cost in the first year, on top of regular MACRS depreciation. The rate was 100% for assets placed in service through 2022, then phased down: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% from 2027 onward. Bonus depreciation applies to new and used property with a recovery period of 20 years or less (equipment, vehicles, software). It can create or increase a net operating loss (unlike Section 179).

What are the IRS luxury vehicle depreciation limits for 2024–2025?

The IRS limits annual depreciation for passenger vehicles (cars and light trucks under 6,000 lbs). For vehicles placed in service in 2024: Year 1 limit is $20,200 ($12,200 without bonus depreciation), Year 2 is $19,500, Year 3 is $11,700, and each subsequent year is $6,960. These limits apply to the total deduction including bonus depreciation and Section 179. Vehicles over 6,000 lbs GVWR (like Ford F-150, Chevrolet Tahoe, Tesla Model X) are exempt and can use full Section 179 and bonus depreciation.

How do I depreciate a used asset or second-hand equipment?

Used assets are depreciated based on their purchase price (not the original cost) over the remaining useful life. Under MACRS, used equipment gets the full recovery period of its asset class — a used computer still uses the 5-year class. Since the Tax Cuts and Jobs Act of 2017, used property also qualifies for bonus depreciation (previously only new property qualified). The depreciable basis is the actual purchase price plus any reconditioning costs, minus salvage value.