How to Calculate Depreciation: Straight-Line and More
Depreciation is the process of allocating the cost of a tangible asset over its useful life. For businesses, it is a tax-deductible expense that reduces taxable income. For individuals, understanding depreciation helps you estimate the declining value of cars, equipment, and real estate. According to the IRS (Publication 946), the most common methods are straight-line, declining balance, and MACRS — the Modified Accelerated Cost Recovery System required for federal tax returns. For 2026, the “One Big Beautiful Bill” restored 100% bonus depreciation for qualified assets placed in service after January 19, 2025.
Quick Answer
- *Straight-line formula: (Cost − Salvage Value) ÷ Useful Life = Annual Depreciation.
- *According to IRS Publication 946, MACRS is the required method for tax depreciation of most business property placed in service after 1986.
- *According to Experian, new cars lose about 20% of value in the first year and 55% over 5 years.
- *For 2026, Section 179 allows businesses to deduct up to ~$1.25 million in qualifying equipment purchases in year one.
Method 1: Straight-Line Depreciation
Straight-line depreciation is the simplest and most commonly used method. The asset loses the same amount of value each year.
Formula
Annual Depreciation = (Cost − Salvage Value) ÷ Useful Life
Worked Example
A business purchases a delivery truck for $50,000 with an estimated salvage value of $5,000 and a useful life of 10 years:
- Depreciable amount: $50,000 − $5,000 = $45,000
- Annual depreciation: $45,000 ÷ 10 = $4,500 per year
- Monthly depreciation: $4,500 ÷ 12 = $375 per month
- Depreciation rate: 1 ÷ 10 = 10% per year
| Year | Depreciation Expense | Accumulated Depreciation | Book Value |
|---|---|---|---|
| 0 | — | — | $50,000 |
| 1 | $4,500 | $4,500 | $45,500 |
| 2 | $4,500 | $9,000 | $41,000 |
| 3 | $4,500 | $13,500 | $36,500 |
| 5 | $4,500 | $22,500 | $27,500 |
| 10 | $4,500 | $45,000 | $5,000 |
Method 2: Double Declining Balance (DDB)
An accelerated method that front-loads depreciation expense. Useful when an asset loses most of its value early (like technology or vehicles).
Formula
Annual Depreciation = 2 × (1 / Useful Life) × Book Value at Start of Year
Worked Example
Same $50,000 truck, 10-year life, $5,000 salvage value. DDB rate = 2 × (1/10) = 20%.
| Year | Start Book Value | Depreciation (20%) | End Book Value |
|---|---|---|---|
| 1 | $50,000 | $10,000 | $40,000 |
| 2 | $40,000 | $8,000 | $32,000 |
| 3 | $32,000 | $6,400 | $25,600 |
| 4 | $25,600 | $5,120 | $20,480 |
| 5 | $20,480 | $4,096 | $16,384 |
Note: DDB cannot depreciate below the salvage value. Once the book value approaches $5,000, switch to straight-line for the remaining years.
After 5 years, DDB has deducted $33,616 vs. $22,500 under straight-line — 49% more in early deductions. This accelerates tax savings for businesses.
Method 3: MACRS (Tax Depreciation)
MACRS is the IRS-required depreciation system for most business property. It uses predetermined recovery periods and accelerated rates published in IRS Publication 946.
Common MACRS Recovery Periods
| Recovery Period | Property Type |
|---|---|
| 3 years | Racehorses, tractor units, specialized tools |
| 5 years | Automobiles, computers, office equipment, R&D equipment |
| 7 years | Office furniture, fixtures, most manufacturing equipment |
| 10 years | Water transportation equipment, single-purpose farm structures |
| 15 years | Land improvements (sidewalks, fences, parking lots) |
| 20 years | Farm buildings, certain municipal utilities |
| 27.5 years | Residential rental property |
| 39 years | Commercial real estate |
MACRS GDS 5-Year Property Example
A $30,000 computer system classified as 5-year MACRS property uses these IRS percentages:
| Year | MACRS % | Depreciation | Cumulative |
|---|---|---|---|
| 1 | 20.00% | $6,000 | $6,000 |
| 2 | 32.00% | $9,600 | $15,600 |
| 3 | 19.20% | $5,760 | $21,360 |
| 4 | 11.52% | $3,456 | $24,816 |
| 5 | 11.52% | $3,456 | $28,272 |
| 6 | 5.76% | $1,728 | $30,000 |
Note that 5-year property takes 6 calendar years to fully depreciate due to the half-year convention (the IRS assumes you place the asset in service midway through year 1).
Section 179 and Bonus Depreciation
Section 179 Expensing
Section 179 allows businesses to deduct the full cost of qualifying equipment in the year of purchase. For 2026, the maximum deduction is approximately $1.25 million, phasing out when total equipment purchases exceed $3.13 million. SUVs over 6,000 lbs GVWR have a separate $32,000 cap.
Bonus Depreciation
The “One Big Beautiful Bill” permanently restored 100% bonus depreciation for qualified assets acquired and placed in service after January 19, 2025. This allows businesses to deduct the entire cost of new and used qualifying property in the first year, with no dollar limit (unlike Section 179).
Car Depreciation: What Vehicles Actually Lose
For personal vehicles, understanding depreciation helps with buying decisions:
| Vehicle Age | Cumulative Depreciation | $35,000 Car Value |
|---|---|---|
| 1 year | ~20% | $28,000 |
| 2 years | ~30% | $24,500 |
| 3 years | ~40% | $21,000 |
| 5 years | ~55% | $15,750 |
| 10 years | ~75% | $8,750 |
Buying a 2–3 year old certified pre-owned vehicle avoids the steepest depreciation while still getting a relatively new car with warranty coverage.
Depreciation Methods Compared
| Method | Pattern | Best For | Used In |
|---|---|---|---|
| Straight-Line | Equal each year | Assets with steady utility | Financial reporting, ADS tax |
| Double Declining | High early, low later | Fast-depreciating assets | Financial reporting |
| MACRS (GDS) | Accelerated + IRS tables | Federal tax returns | U.S. tax depreciation |
| Units of Production | Based on usage | Manufacturing equipment | Financial reporting |
| Sum of Years Digits | Moderate acceleration | Assets losing value early | Financial reporting |
See how your vehicle depreciates over time
Use our free Car Depreciation Calculator →Also useful: ROI Calculator · Auto Loan Calculator
Frequently Asked Questions
What is the straight-line depreciation formula?
Annual Depreciation = (Cost − Salvage Value) ÷ Useful Life. For a $50,000 asset with $5,000 salvage and 10-year life: ($50,000 − $5,000) ÷ 10 = $4,500 per year. The same amount each year.
What is MACRS depreciation?
MACRS is the IRS-required depreciation system for business property. It uses predetermined recovery periods (3–39 years) and accelerated rates that provide larger deductions in early years. Most equipment uses 200% declining balance switching to straight-line.
How fast does a new car depreciate?
A new car loses about 20% in the first year and 55% over 5 years. A $35,000 car is worth roughly $15,750 after 5 years. Luxury vehicles depreciate faster (65–75% in 5 years), while compact cars hold value better (about 50% loss).
What is the difference between depreciation and amortization?
Depreciation applies to tangible assets (vehicles, machinery, buildings). Amortization applies to intangible assets (patents, copyrights, goodwill). Both spread cost over useful life, but the IRS uses different rules and recovery periods for each.
What is Section 179 depreciation?
Section 179 allows businesses to deduct the full cost of qualifying equipment in the year of purchase instead of depreciating over years. The 2026 maximum is approximately $1.25 million, with phase-out at $3.13 million. SUVs have a separate $32,000 limit.