Spreading a Cost Over Time
An asset used for several years should not be expensed entirely in the year it is bought. Depreciation allocates that cost across its useful life, matching the expense to the periods that benefit from it. The depreciable base is always cost minus salvage value — what the asset is expected to be worth when finished with.
The Four Methods
- Straight line — (Cost − Salvage) / Life. Equal every year. Simple and the most common for financial reporting.
- Double declining balance — 2/Life applied to the remaining book value. Heavily front-loaded.
- 150% declining balance — the same idea at 1.5/Life. A middle ground.
- Sum of years digits — weights each year by remaining life over the sum of the digits. Front-loaded but smoother than declining balance.
All four write off exactly the same total. They differ only in timing, which matters for tax deferral and for how profit appears in early years.
Depreciation Chart by Method
A $50,000 asset with a $5,000 salvage value over 7 years:
| Year | Straight line | 150% declining | Double declining | Sum of years |
|---|---|---|---|---|
| 1 | $6,429 | $10,714 | $14,286 | $11,250 |
| 2 | $6,429 | $8,418 | $10,204 | $9,643 |
| 3 | $6,429 | $6,614 | $7,289 | $8,036 |
| 4 | $6,429 | $5,196 | $5,207 | $6,429 |
| 5 | $6,429 | $4,082 | $3,719 | $4,821 |
| 6 | $6,429 | $3,207 | $2,657 | $3,214 |
| 7 | $6,429 | $2,520 | $1,638 | $1,607 |
Double declining takes 32% of the total in year one against straight line's 14%. For a profitable business, that early deduction is worth real money through tax deferral.
MACRS Is What U.S. Tax Actually Uses
For federal tax purposes, the Modified Accelerated Cost Recovery System assigns assets to a class life — 5 years for vehicles and computers, 7 for office furniture and most machinery, 27.5 for residential rental property, 39 for commercial buildings — and applies fixed percentage tables. MACRS ignores salvage value entirely and uses a half-year convention in the first year.
Section 179 and Bonus Depreciation
Section 179 allows immediate expensing of qualifying assets up to $1,250,000 in 2025, phasing out above $3,130,000 of purchases. Bonus depreciation permits an additional percentage in the first year. Together they mean many small businesses deduct the entire cost of equipment immediately rather than depreciating it at all.
Frequently Asked Questions
Which method should I use?
Straight line for financial statements, because it is simplest and shows stable profit. MACRS for U.S. tax, because it is required. Accelerated methods where deferring tax is valuable and the asset genuinely loses value fastest early.
What is book value?
Cost minus accumulated depreciation. It is an accounting figure, not a market value — a fully depreciated machine still working is worth more than its zero book value.
Is land depreciated?
No. Land is considered to have an unlimited useful life. When buying property, the purchase price must be split between land and building, and only the building is depreciated.