What is depreciation?
Depreciation spreads the cost of a long-lasting asset, such as a machine, vehicle or computer, over its useful life. It shows how the asset loses value on the books and lets a business deduct the cost over several years instead of all at once.
Depreciation methods
- Straight-line – the same amount every year: (cost − salvage value) ÷ useful life.
- Double-declining balance – twice the straight-line rate applied to the remaining book value, so more depreciation early. The calculator switches to straight-line when that gives more, and never goes below the salvage value.
- Sum-of-years' digits – also front-loaded, with each year's share based on the years remaining.
Tax depreciation
On U.S. tax returns, most business property is depreciated with the IRS Modified Accelerated Cost Recovery System (MACRS), which uses set recovery periods. Many businesses can instead deduct qualifying purchases right away with Section 179 expensing or bonus depreciation. See IRS Publication 946 or ask a tax professional.
Frequently asked questions
What is salvage value?
The amount you expect the asset to be worth at the end of its useful life. It is not depreciated.
Can I depreciate my home?
Not your personal residence. Rental property and the business-use part of a home can be depreciated.
What is book value?
The asset's cost minus all depreciation taken so far.