Depreciation Methods: Everything Bookkeepers Need to Know
Updated March 2026 · 18 min read · 1,300 monthly searches
What Is Depreciation?
Depreciation is the systematic allocation of an asset's cost over its useful life. When a business buys equipment for $50,000, it doesn't expense the full amount in year one (unless using Section 179 or bonus depreciation). Instead, the cost is spread across the years the equipment generates revenue.
This follows the matching principle: expenses should be recognized in the same period as the revenue they help generate.
Key Depreciation Terms
- Cost basis: Purchase price + sales tax + delivery + installation
- Salvage value (residual value): Estimated value at end of useful life
- Depreciable base: Cost basis − Salvage value
- Useful life: Estimated period the asset will generate economic benefit
- Accumulated depreciation: Total depreciation recorded to date (contra asset on balance sheet)
- Book value: Cost basis − Accumulated depreciation
Method 1: Straight-Line Depreciation
The simplest and most common method. Equal expense each year.
Example: Equipment costs $50,000. Salvage value: $5,000. Useful life: 5 years.
Annual depreciation = ($50,000 − $5,000) ÷ 5 = $9,000/year
Best for: Assets that lose value evenly over time (office furniture, buildings). Most small businesses default to this method for simplicity.
Method 2: Double Declining Balance (DDB)
An accelerated method that front-loads depreciation expense. Higher expense in early years, lower in later years.
Example (same $50K equipment, 5-year life):
- Year 1: 2 × 20% × $50,000 = $20,000
- Year 2: 40% × $30,000 = $12,000
- Year 3: 40% × $18,000 = $7,200
- Year 4: 40% × $10,800 = $4,320
- Year 5: Remaining to salvage = $1,480
Best for: Assets that lose value quickly (technology, vehicles). Matches expense to the period where the asset generates the most value.
Method 3: MACRS (Modified Accelerated Cost Recovery System)
Required for US federal tax purposes. MACRS assigns assets to property classes with predetermined depreciation schedules. Note: MACRS ignores salvage value — you depreciate the entire cost.
Common MACRS classes:
- 3-year: Certain small tools, racehorses
- 5-year: Computers, vehicles, office machinery
- 7-year: Office furniture, most equipment
- 15-year: Land improvements, parking lots
- 27.5-year: Residential rental property
- 39-year: Commercial buildings
Advisory tip: Many small businesses don't realize they're required to use MACRS for tax and may use a different method for book purposes. Understanding both is essential for advisory professionals who help with tax planning and financial reporting.
Method 4: Units of Production
Ties depreciation to actual usage rather than time.
Example: A printing press costs $100,000, salvage $10,000, expected to produce 1,000,000 prints. Depreciation = $0.09 per print. In a month that produces 50,000 prints: $4,500 depreciation.
Best for: Manufacturing equipment, vehicles (miles driven), or any asset where wear correlates directly with usage rather than time.
Section 179 and Bonus Depreciation
These aren't depreciation "methods" per se, but tax provisions that allow faster cost recovery:
- Section 179: Allows businesses to deduct the full purchase price of qualifying equipment in the year of purchase (up to $1,220,000 for 2024, adjusted annually). Incredibly powerful for tax planning.
- Bonus depreciation: Allows 60% first-year depreciation on new and used assets (2026 rate — phasing down from 100% in 2022). Applies to MACRS property with a life of 20 years or less.
Advisory gold: Helping clients strategically time equipment purchases for optimal Section 179 and bonus depreciation benefits is one of the highest-value tax planning conversations. A well-timed purchase can save tens of thousands in taxes.
Book vs. Tax Depreciation
Businesses often use different depreciation methods for financial reporting (book) and tax returns. This creates a temporary difference that results in deferred tax assets or liabilities.
- Book depreciation: Straight-line (most common) — smoother income statement
- Tax depreciation: MACRS or Section 179 — faster write-offs, lower current tax bill
Understanding this distinction is critical for advisory work. When a client sees their tax return showing different depreciation than their financial statements, they'll ask why. Having a clear, confident answer builds trust.
Choosing the Right Method
| Scenario | Recommended Method |
|---|---|
| Simple, even value decline | Straight-line |
| Technology/vehicles (rapid early depreciation) | Double declining balance |
| US tax returns | MACRS (required) |
| Manufacturing equipment | Units of production |
| Tax minimization (current year) | Section 179 / Bonus depreciation |
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Start Your Advisory Journey →Frequently Asked Questions
What depreciation method do most small businesses use?
Straight-line for book purposes (simple and predictable) and MACRS for tax purposes. Many use Section 179 to expense equipment purchases immediately for tax benefits.
Can you change depreciation methods?
Yes, but it requires justification and may need IRS approval (Form 3115 for tax method changes). For book purposes, a change in method is treated as a change in accounting estimate and applied prospectively.
Does land depreciate?
No. Land has an unlimited useful life and is not depreciable. However, land improvements (parking lots, landscaping, fences) are depreciable. When purchasing property, the land vs. building allocation significantly impacts depreciation deductions — another high-value advisory conversation.