2 main methods
Straight-line vs. accelerated depreciation
Straight-line depreciation spreads an asset's cost evenly across its useful life — equal annual amounts. Accelerated methods (declining balance, MACRS, Section 179) front-load deductions into early years. Accelerated saves more taxes upfront and improves early-year cash flow but reduces deductions later. Choose straight-line for predictable income; accelerated for businesses prioritising near-term tax savings.
Level
Try calculatorKey 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
Depreciation allocates the cost of a long-lived asset over its useful life.
Straight-line method: The same amount expensed each year.
$$\text{Annual depreciation} = \frac{\text{Cost} - \text{Salvage value}}{\text{Useful life (years)}}$$
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.