Straight-line vs. accelerated depreciation
Key takeaways
04 · ideas- Straight-line depreciation spreads cost evenly over useful life
- MACRS front-loads deductions in early years for tax purposes
- Section 179 allows immediate expensing of qualifying business assets
- Book and tax depreciation can differ for the same asset
Basic level
The essentials · 1 min
Depreciation allocates the cost of a long-lived asset over its useful life.
Straight-line method: The same amount expensed each year.
A $40,000 vehicle with $5,000 salvage value and 7-year life: $35,000 / 7 = $5,000/year.
Double declining balance (DDB): Applies double the straight-line rate to the remaining book value each year.- Year 1: $40,000 x (2/7) = $11,429
- Year 2: ($40,000 - $11,429) x (2/7) = $8,163
Accelerated methods record larger deductions in early years and smaller deductions in later years.
Intermediate level
How it applies · 2 min
MACRS: the US tax system
For US income taxes, the IRS uses Modified Accelerated Cost Recovery System (MACRS):
| Asset class | Recovery period | Example |
|---|---|---|
| 5-year | 5 years | Cars, computers |
| 7-year | 7 years | Office furniture |
| 27.5-year | 27.5 years | Residential rental |
| 39-year | 39 years | Commercial real estate |
MACRS uses either 200% or 150% declining balance, switching to straight-line when that produces larger deductions.
Section 179 allows businesses to immediately deduct the full cost of qualifying property in the year placed in service, up to an annual limit.
Advanced level
The math, step by step · 1 min
Book vs. tax depreciation
Companies often use different methods for financial reporting (GAAP) vs. tax purposes. Straight-line is common for financial statements; MACRS is used for taxes. This creates a deferred tax liability: larger tax deductions early create a timing difference that reverses in later years. ASC 740 requires this liability to be recognized on the balance sheet.