What is straight-line depreciation and when should I use it?+
Straight-line depreciation spreads the cost of an asset evenly over its useful life. Annual depreciation = (Cost - Salvage Value) / Useful Life. It is the simplest and most commonly used method, ideal for assets that lose value at a consistent rate such as office furniture, buildings, and general equipment. Most businesses use straight-line for financial reporting because of its simplicity and predictability.
How does double declining balance depreciation work?+
Double declining balance (DDB) is an accelerated method that depreciates assets faster in early years. The rate is 2 / Useful Life, applied to the remaining book value each year. For a 5-year asset, the rate is 40% per year. DDB front-loads depreciation expense, which can provide larger tax deductions in early years. It is commonly used for vehicles, computers, and technology equipment that lose value quickly.
What is the sum of years' digits method?+
Sum of years' digits (SYD) is another accelerated depreciation method. For a 5-year asset, the sum is 1+2+3+4+5 = 15. Year 1 depreciates 5/15 of the depreciable base, Year 2 depreciates 4/15, and so on. Like DDB, it produces higher depreciation in early years but follows a smoother, more predictable decline than DDB. It is useful for assets whose productivity decreases steadily over time.
When should I use units of production depreciation?+
Units of production depreciation ties the expense to actual usage rather than time. Depreciation per unit = (Cost - Salvage) / Total Expected Units. This method is ideal for manufacturing equipment, vehicles (by mileage), or any asset whose wear correlates with output rather than age. If a machine produces 10,000 units one year and 5,000 the next, depreciation expense adjusts proportionally.
What are Section 179 and bonus depreciation for tax purposes?+
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment in the year of purchase, rather than depreciating it over time. For 2024, the deduction limit is $1,220,000. Bonus depreciation (under the Tax Cuts and Jobs Act) allows 60% first-year depreciation on new and used qualifying assets in 2024, stepping down 20% each year. These provisions can significantly reduce taxable income in the year of asset purchase.
What is salvage value and how do I estimate it?+
Salvage value (also called residual or scrap value) is the estimated amount an asset will be worth at the end of its useful life. It is subtracted from the asset cost to determine the depreciable base. Common approaches include researching resale markets, using a percentage of original cost (e.g., 10%), or setting it to $0 for assets with no resale value. The IRS allows a salvage value of $0 for most MACRS property.