Depreciation allocates the cost of an asset over its useful life—essential for accurate accounting, tax deductions, and understanding the true cost of business investments. This calculator computes depreciation using common methods.
How This Calculator Works
This calculator determines asset depreciation:
- Asset Cost: Original purchase price
- Salvage Value: Expected value at end of useful life
- Useful Life: Years the asset will be used
- Depreciation Method: Straight-line, declining balance, or other
- Annual Depreciation: Yearly expense amount
- Depreciation Schedule: Year-by-year value and expense
The Formula Explained
Straight-Line Depreciation: Depreciation = (Cost - Salvage Value) / Useful Life
Double-Declining Balance: Depreciation = (2 / Useful Life) × Book Value at Beginning of Year
Sum-of-Years' Digits: Depreciation = (Remaining Life / Sum of Years) × (Cost - Salvage)
Step-by-Step Example
$50,000 Equipment, 5-Year Life, $5,000 Salvage
| Method | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Straight-Line | $9,000 | $9,000 | $9,000 | $9,000 | $9,000 |
| Double-Declining | $20,000 | $12,000 | $7,200 | $4,320 | $1,480* |
| Sum-of-Years | $15,000 | $12,000 | $9,000 | $6,000 | $3,000 |
*Adjusted to reach salvage value. Accelerated methods front-load deductions.
Frequently Asked Questions
What is depreciation and why does it matter?
Depreciation is an accounting method that spreads an asset's cost over its useful life. Instead of expensing $100,000 equipment in year one, you expense $20,000 annually for 5 years. This matches expense to the revenue the asset generates and provides ongoing tax deductions.
What's the difference between book depreciation and tax depreciation?
Book depreciation (for financial statements) uses methods reflecting actual asset life. Tax depreciation (MACRS in the US) uses IRS-specified rates for tax deductions. These often differ—you might depreciate over 10 years for books but 7 years for taxes. Most businesses track both.
What is straight-line depreciation?
Straight-line is the simplest method: equal depreciation each year. Formula: (Cost - Salvage) / Years. A $10,000 asset with $1,000 salvage over 5 years = $1,800/year. It's appropriate when assets provide equal benefit each year.
What is accelerated depreciation?
Accelerated methods (double-declining balance, sum-of-years' digits) front-load depreciation expense—higher deductions early, lower later. This reduces taxes in early years (when cash flow may be tighter) and reflects how some assets lose value quickly initially.
What is MACRS depreciation?
MACRS (Modified Accelerated Cost Recovery System) is the IRS standard for tax depreciation. Assets are assigned to classes (3, 5, 7, 15, 27.5, or 39 years) with prescribed annual percentages. Most equipment is 5-7 years. MACRS typically accelerates deductions compared to useful life.
What is salvage value?
Salvage value (also called residual value) is the expected value when you dispose of the asset. If you buy equipment for $50,000 and expect to sell it for $5,000 after 10 years, salvage is $5,000. You only depreciate the $45,000 difference. For tax purposes, salvage is often assumed to be zero.
Can land be depreciated?
No—land never depreciates for accounting or tax purposes. Only improvements to land (buildings, landscaping) can be depreciated. When you buy real estate, you must allocate the purchase price between land (not depreciable) and building (depreciable).
How does depreciation affect cash flow?
Depreciation is a non-cash expense—no money leaves your business. However, it reduces taxable income, lowering your tax bill. This tax savings is real cash. That's why depreciation is added back in cash flow statements and why accelerated depreciation improves early-year cash flow.
Key Points to Remember
- Non-cash expense: Reduces taxes without spending money
- Matching principle: Expense when asset generates revenue
- Tax vs book: Companies often use different methods for each
- Accelerated saves taxes early: Front-loads deductions
- Land doesn't depreciate: Only buildings and improvements do