Depreciation Calculator

Calculate asset depreciation over time using different methods including straight-line, declining balance, and sum-of-years-digits.

📊 Depreciation Calculator

What is Depreciation?

Depreciation is the systematic allocation of an asset's cost over its useful life. It represents the decline in value of tangible assets such as equipment, vehicles, buildings, and machinery due to wear and tear, obsolescence, or age.

This calculator helps businesses and individuals estimate depreciation expense using multiple methods approved by accounting standards and tax authorities. Understanding depreciation is essential for accurate financial reporting, tax planning, and capital budgeting decisions.

The total amount depreciated over an asset's life equals its cost minus salvage value (the estimated value at the end of useful life). Different methods change the timing of expense recognition but not the total amount.

How to Use This Calculator

Select Depreciation Method: Choose from straight-line (even expense each year), declining balance (higher expense in early years), or sum-of-years-digits (accelerated depreciation).
Enter Asset Cost: Input the purchase price or capitalized cost of the asset including installation and setup costs.
Set Salvage Value: Estimate the asset's residual value at the end of its useful life. This can be zero for fully consumed assets.
Define Useful Life: Enter the expected number of years the asset will be used. Refer to industry standards or tax guidelines for typical useful lives.
Configure Options: Choose whether to round results to whole dollars and whether to apply partial-year depreciation conventions for assets placed in service mid-year.

Key Insights & Best Practices

Choosing the right depreciation method depends on the asset type and how it generates economic benefits:

Straight-Line Method: Best for assets that provide steady benefits over time, such as office furniture or buildings. This is the simplest and most commonly used method.
Declining Balance Method: Ideal for assets that are more productive or lose value faster in early years, such as computers, vehicles, or technology equipment. The double-declining balance (factor of 2) is most common.
Sum-of-Years-Digits: Another accelerated method that front-loads depreciation expense, useful for assets with higher early-life productivity or rapid obsolescence.
Units-of-Production: While not included in this calculator, this method ties depreciation to actual usage (miles driven, units produced) rather than time, suitable for manufacturing equipment or vehicles.

Important: Book depreciation (for financial reporting) often differs from tax depreciation. In the U.S., tax depreciation typically follows MACRS (Modified Accelerated Cost Recovery System) rules with prescribed recovery periods and conventions. This calculator provides general estimates and should not replace professional tax advice.

For mixed-use assets (e.g., a car used partly for business), only the business-use percentage of the cost is depreciable. Periodically review useful lives and salvage values if circumstances change, and consider impairment testing if an asset's value declines unexpectedly.

Technical Details & Formulas

Understanding the mathematics behind each depreciation method helps ensure accurate calculations and informed decision-making:

Core concepts:

Depreciable Base: Asset Cost - Salvage Value. This is the total amount to be depreciated over the asset's useful life.
Straight-Line Formula: Annual Depreciation = (Cost - Salvage Value) / Useful Life. This spreads the depreciable base evenly across all years.
Declining Balance Formula: Annual Depreciation = Book Value × (Factor / Useful Life). The rate is applied to the current book value, not the original cost. Common factors are 1.5 (150% declining balance) or 2 (double-declining balance).
Sum-of-Years-Digits Formula: Annual Depreciation = (Remaining Life / Sum of Years) × Depreciable Base. The sum of years equals n(n+1)/2 where n is useful life. For a 5-year asset: 5+4+3+2+1 = 15.

Partial-year conventions adjust first-year depreciation when an asset is placed in service during the year. The half-year convention assumes all assets are placed in service at mid-year, taking half a year's depreciation in year one. The mid-month convention is more precise, calculating depreciation from the middle of the month the asset was placed in service.

Modern accounting standards (GAAP, IFRS) require depreciation methods to be systematic and rational, matching the pattern of economic benefits. Straight-line remains the default for most assets, but accelerated methods are appropriate when assets are more productive or lose value faster in early years.

Frequently Asked Questions

What's the difference between book and tax depreciation?

Book depreciation follows accounting standards (GAAP/IFRS) for financial reporting, while tax depreciation follows tax code rules (like MACRS in the U.S.) to calculate deductible expenses. Companies often maintain two sets of depreciation schedules. Tax depreciation is typically more accelerated to encourage capital investment.

Can I change depreciation methods after I start?

Generally, no. Accounting standards require consistency. Changing methods is considered a change in accounting estimate and requires disclosure and justification. For tax purposes, you typically must continue with the method chosen in the first year unless you receive IRS approval to change.

What happens if I sell an asset before its useful life ends?

You'll recognize a gain or loss equal to the sale price minus the book value (original cost minus accumulated depreciation). If you sell for more than book value, you have a gain; if less, you have a loss. For tax purposes, this may be treated as ordinary income or capital gain depending on the asset type and holding period.

How do I determine useful life and salvage value?

Useful life should reflect how long you expect to use the asset, considering physical wear, technological obsolescence, and business needs. Industry guidelines and tax tables (like IRS Publication 946) provide standard useful lives. Salvage value is your best estimate of what the asset will be worth at the end of its useful life, which can be zero for fully consumed assets.

What assets cannot be depreciated?

Land cannot be depreciated as it doesn't wear out. Inventory held for sale, securities and investments, and personal-use property are also not depreciable. Assets must be used in business or income-producing activities, have a determinable useful life exceeding one year, and be expected to decline in value over time.

Should I use accelerated depreciation?

Accelerated methods (declining balance, sum-of-years-digits) are appropriate when assets are more productive in early years or lose value faster initially, such as technology equipment or vehicles. They provide larger tax deductions early on, improving cash flow. However, they also reduce reported income in early years. Consider your specific asset characteristics, tax situation, and financial reporting goals.

References & Further Reading

1. NetSuite - What is Depreciation? Calculation, Types, Examples

2. Investopedia - Depreciation: Definition and Types

3. IRS Publication 946 - How to Depreciate Property

4. AccountingTools - What is Depreciation?