What Depreciation Actually Means
When a business buys equipment, a vehicle, or machinery, the money leaves on day one — but the asset keeps earning for years. Depreciation is the accounting method that spreads that one-off cost across the years the asset is actually used, so the expense lines up with the revenue it helps produce instead of creating one enormous dip in a single month's profit.
Two numbers matter as you go. Depreciation expense is what you write off in a given year. Book value is what is left: the original cost minus everything written off so far. The chart above tracks book value falling year by year, and the schedule shows exactly how it gets there.
How This Calculator Works (Every Formula)
Each tab runs a different standard method. None of them are approximations — these are the same formulas used in accounting textbooks and by the IRS.
The MACRS tab is worth a note on accuracy: rather than hard-coding percentage tables, this calculator derives them from the underlying rules and the result matches the published IRS Publication 946 percentage tables for all six General Depreciation System property classes — 3, 5, 7, 10, 15 and 20-year — with every schedule summing to exactly 100% of basis.
Choosing a Depreciation Method
Straight line wins on simplicity. The same number every year makes budgeting, forecasting, and explaining your financials to a lender straightforward. It is the default choice for financial statements at most small businesses.
Declining balance and sum of the years’ digits are accelerated: they front-load the expense. These fit assets that genuinely lose most of their value early — a computer, a company car, anything facing fast obsolescence. Declining balance with a factor of 2 is what people mean by "double declining balance."
Units of production ties depreciation to output rather than the calendar. A press that stamps 40,000 parts one year and 8,000 the next depreciates accordingly, which matches cost to actual wear far better than a time-based method. It is common in manufacturing and for vehicles measured by mileage.
One thing that surprises people: over the asset's full life, every method writes off the same total amount. Only the timing changes. Accelerated methods do not give you a bigger deduction overall — they give it to you sooner, which is worth something because a dollar of tax saved today beats a dollar saved in year five.
MACRS: What US Businesses Use on Tax Returns
Here is the part that trips up most first-time business owners. The method you pick for your own books is largely your choice — but for a US federal tax return, the IRS generally requires the Modified Accelerated Cost Recovery System. MACRS is not optional preference; it is the prescribed system for most tangible property placed in service after 1986.
MACRS differs from book methods in three ways that matter. It ignores salvage value entirely — assets are written down to zero. It assigns a fixed recovery period by property class rather than letting you estimate useful life: cars and computers are 5-year property, most machinery and office furniture are 7-year, land improvements are 15-year. And it applies a convention, usually half-year, which is why a "5-year" asset actually shows up across six tax years on the schedule above.
Two things this calculator deliberately does not model, because they change with each filing year and depend on your specific situation: the Section 179 deduction and bonus depreciation, both of which can let you expense a large share of an asset immediately instead of spreading it. If either applies to you, they are applied before the MACRS schedule runs on whatever basis is left. Check the current-year limits in IRS Publication 946 or with your accountant — those figures move.
Salvage Value and Useful Life, Explained
Salvage value (also called residual or scrap value) is what you realistically expect the asset to be worth when you are finished with it — the trade-in on a truck, the parts value of a machine. It is an estimate, and nobody expects it to be exact. Setting it to zero is common and perfectly acceptable when an asset will be worth nothing meaningful at the end. Note the asymmetry in how methods treat it: straight line and sum-of-years subtract salvage from the cost up front, declining balance uses it only as a floor, and MACRS ignores it completely.
Useful life is how long you expect the asset to serve your business, not how long it could physically survive. A delivery van might run for fifteen years but only stay in your fleet for six. For book purposes you estimate this yourself based on how you actually use the asset; for tax purposes MACRS decides it for you through the property class.
Partial-Year Depreciation and Conventions
Assets rarely arrive on January 1. The First-Year Convention selector handles this. Full year assumes the asset served the entire first year. Half-year gives it exactly six months regardless of purchase date — simple, widely accepted, and what MACRS uses by default. Mid-month and mid-quarter prorate based on when in the year the asset actually entered service, which is more precise and required in certain situations.
Whichever you choose, the depreciation not taken in year one does not disappear — it rolls into an extra period at the end of the schedule. That is why selecting a partial-year convention on a 5-year asset produces six lines instead of five, and why the total written off stays identical either way.
Book Depreciation vs. Tax Depreciation
Most US businesses run two depreciation schedules for the same asset, and this is normal rather than a sign something is wrong. The book schedule — usually straight line — goes on the financial statements you show lenders and investors, because steady, predictable expense makes the business easier to read. The tax schedule uses MACRS, which front-loads deductions and lowers this year's tax bill.
The gap between them is called a book-tax difference, and it reverses over time: MACRS deducts more early and less later, so by the end of the asset's life both schedules have written off the same total. Your accountant tracks the difference as deferred tax. For planning purposes, the practical takeaway is to use the straight-line tab when you are thinking about how your financials will look, and the MACRS tab when you are estimating a tax deduction.
A Worked Example
Take a $10,000 machine with a $1,000 salvage value and a 5-year useful life. Under straight line, the depreciable base is $9,000 and you write off $1,800 every year for five years.
Switch to double declining balance (factor 2) and the rate becomes 40% of book value: $4,000 in year one, then $2,400, $1,440, $864, and a final $296 as depreciation stops at the $1,000 salvage floor. Under sum of the years’ digits, the digits total 15, so year one takes 5/15 of $9,000 = $3,000, year two 4/15 = $2,400, down to $600 in year five.
Now compare the tax view. The same $10,000 asset as 5-year MACRS property ignores salvage entirely and writes off the full cost: 20% ($2,000) in year one thanks to the half-year convention, then 32% ($3,200), 19.2% ($1,920), 11.52% ($1,152), 11.52% ($1,152) and a closing 5.76% ($576) in year six. Every method above eventually writes off its full base — the only thing that changes is how quickly.
Frequently Asked Questions
What is the formula for straight-line depreciation?
Straight-line depreciation is (Asset Cost − Salvage Value) ÷ Useful Life. That single figure is your depreciation expense for every full year of the asset's life. It is the simplest method and the one most businesses use for their own financial statements, because the expense is identical every year and easy to budget around.
Which depreciation method should I use?
For your own books, straight-line is the usual choice because it is simple and predictable. For a US federal tax return you generally must use MACRS, which is an accelerated method the IRS prescribes. Declining balance and sum-of-the-years' digits are accelerated book methods that suit assets losing most of their value early, and units of production suits machinery whose wear depends on output rather than time.
What is the difference between MACRS and straight-line depreciation?
Straight-line spreads cost evenly and lets you pick your own useful life and salvage value. MACRS is the IRS system for US tax returns: it assigns your asset to a fixed recovery period, ignores salvage value entirely, and front-loads deductions using declining balance that automatically switches to straight-line when that gives a bigger write-off. Most US businesses run both — MACRS for the tax return, straight-line for the financial statements.
Does salvage value affect declining balance depreciation?
Not in the annual calculation itself — declining balance applies its rate to the asset's remaining book value, not to a cost-minus-salvage base. Salvage value acts as a floor instead: once book value reaches the salvage amount, depreciation stops, so you never write the asset below what you expect it to be worth.
What is the half-year convention?
It is an accounting shortcut that treats every asset as if it were placed in service exactly halfway through the year, no matter which month you actually bought it. You claim half a year of depreciation in the first year and the other half in an extra year at the end. MACRS uses this convention by default, which is why a 5-year asset actually appears across six tax years.
Can I change depreciation methods after I have started?
For your internal books you can, but it is treated as a change in accounting estimate or principle and generally needs to be disclosed and applied consistently going forward. For US tax purposes, switching methods on an asset already in service usually requires IRS consent through a change in accounting method filing — this is a point to raise with your accountant rather than something to change casually.
Which assets cannot be depreciated?
Land is the main one — it is assumed not to wear out, so it is never depreciated even though buildings on it are. Inventory, assets held for resale, and anything you do not own or use in a business or income-producing activity are also excluded. Intangible assets such as patents and software are written off through amortization instead, which follows similar mechanics under a different name.
Is depreciation an actual cash expense?
No. The cash left your business when you bought the asset. Depreciation is the accounting entry that spreads that already-spent cost across the years the asset is used, so it lowers reported profit and taxable income without any money moving in that year. That is why cash flow statements add depreciation back when working from net income.
This calculator provides estimates for general informational purposes only and is not tax, accounting, or financial advice. Depreciation rules — including property classifications, Section 179 limits, and bonus depreciation — change between filing years and depend on your specific circumstances. Confirm any figure used on a tax return with a qualified accountant or the current IRS Publication 946.