How to Calculate Depreciation Expense: Methods, MACRS, and Recapture

To calculate depreciation expense, subtract an asset’s salvage value from its cost basis and spread the resulting depreciable base across the years you’ll use the property. The straight-line method divides that base evenly; accelerated methods front-load the deduction; the units-of-production method ties it to actual output. For a federal tax return, most business property must run through the IRS’s Modified Accelerated Cost Recovery System (MACRS), which assigns both the method and the recovery period based on what the asset is.

The Three Inputs Every Formula Needs

Before you pick a method, gather three numbers.

Cost basis is more than the sticker price. It includes sales tax, shipping, installation, and testing — anything you paid to get the asset ready for use.¹

Salvage value is your best estimate of what the asset will be worth when you’re done with it.

Useful life is how long you expect to use the property, measured in years for time-based methods or total output for the units-of-production method. For tax depreciation, you don’t estimate this — the IRS assigns recovery periods by asset class in Publication 946.²

The property itself has to qualify. You must own it, use it in business or to produce income, be able to determine its useful life, and expect it to last more than a year. Land never depreciates because it doesn’t wear out. Inventory, patents and other intangibles (which are amortized instead), and property placed in service and disposed of the same year are also excluded.²

Straight-Line Method

This is the simplest formula and the workhorse of financial reporting. Take the cost basis, subtract salvage value, and divide by useful life in years.

A $10,000 machine with a $2,000 salvage value and a five-year life has an $8,000 depreciable base. Divide by five: $1,600 per year, every year, until book value reaches $2,000. The trade-off is that you don’t get a bigger deduction early on. Straight-line fits assets that lose value at a roughly even pace, like office furniture or buildings.

Double-Declining Balance Method

An accelerated method that produces large deductions early and small ones later. Calculate the straight-line rate (for a five-year asset that’s 20%), double it to 40%, and apply that rate each year to the asset’s current book value — cost minus accumulated depreciation — rather than to the depreciable base.

For a $10,000 asset with a five-year life:

Year 1: 40% of $10,000 = $4,000
Year 2: 40% of $6,000 = $2,400
Year 3: 40% of $3,600 = $1,440

Salvage value doesn’t feed the rate, but it sets a floor: you stop depreciating once book value reaches it. One practical wrinkle matters here. At some point the straight-line calculation on the remaining book value will produce a larger annual deduction than the declining-balance calculation. When it does, you switch to straight-line for the remaining years to maximize the total write-off.² If you’re using the MACRS percentage tables, that crossover is already built in.

Sum-of-the-Years-Digits Method

Another accelerated approach, this one uses a declining fraction. Add the digits of each year in the useful life to get the denominator. For a five-year life: 5 + 4 + 3 + 2 + 1 = 15. The numerator is the number of years remaining at the start of each period. Apply the fraction to the full depreciable base (cost minus salvage), not to book value.

For a $10,000 asset with no salvage value over five years:

Year 1: 5/15 × $10,000 = $3,333
Year 2: 4/15 × $10,000 = $2,667
Year 3: 3/15 × $10,000 = $2,000

If the same asset had a $1,000 salvage value, each fraction would apply to $9,000 instead.

Units of Production Method

The other three methods are time-based. This one ties depreciation directly to how much work the asset actually did. Divide the depreciable base by the total units the asset is expected to produce over its life, then multiply that per-unit rate by actual output each year.

A $50,000 machine with no salvage value and an expected lifetime output of 100,000 units carries a per-unit rate of $0.50. Produce 25,000 units in year one and depreciation is $12,500. A slow year of 8,000 units drops the expense to $4,000. This method requires production tracking but gives the most accurate picture of asset consumption. It fits manufacturing equipment and vehicles with mileage-based wear.

MACRS: The Required Method for Tax Returns

For most business property, you don’t get to choose freely among the methods above when filing federal taxes. MACRS assigns each asset class a recovery period and a default method:

Computers and vehicles: 5-year class
Office furniture: 7-year class
Nonresidential real property (commercial buildings): 39-year straight-line

Most personal property in the 3-, 5-, 7-, and 10-year classes uses the 200% declining balance method with the automatic switch to straight-line. Property in the 15- and 20-year classes uses 150% declining balance. Real property runs straight-line over its full recovery period.² Publication 946 includes percentage tables that handle the math: find the asset class, look up the year, and apply the listed percentage to the cost basis.

MACRS also imposes a convention that decides how much you claim in the first and last year. The default half-year convention treats every asset as placed in service at the midpoint of the year, so you get half a year’s depreciation regardless of the actual date.² If more than 40% of your total depreciable property for the year was placed in service in the last three months, the mid-quarter convention applies instead, assigning depreciation based on which quarter the asset entered service.³ That rule blocks year-end buying sprees from claiming a full half-year deduction.

When You Can Skip the Spread: Section 179 and Bonus Depreciation

Two provisions let you write off some or all of an asset’s cost in the year you place it in service, changing the calculation entirely.

Section 179 allows businesses to deduct up to $2,560,000 of qualifying equipment and software purchased during the 2026 tax year, with the limit phasing out dollar-for-dollar once total purchases exceed $4,090,000.⁴ These thresholds adjust annually for inflation. The deduction is capped at your taxable income from active business operations, so it can’t create or increase a net loss.

Bonus depreciation under the One Big Beautiful Bill Act, signed in mid-2025, allows a permanent 100% first-year deduction for qualified property acquired after January 19, 2025.⁵ That covers most MACRS property with a recovery period of 20 years or less, plus computer software and qualified improvement property such as interior renovations to commercial buildings.⁶ Unlike Section 179, bonus depreciation has no dollar cap and can create a net operating loss. Property acquired before January 20, 2025, and placed in service during 2026 falls under the older phase-down schedule at only 20% bonus depreciation.

Many businesses apply Section 179 first to selected assets, then claim bonus depreciation on the remaining cost or on assets that don’t qualify for Section 179.

What Happens When You Sell: Depreciation Recapture

The deduction you take now can partly reverse later. If you sell a depreciated asset for more than its adjusted book value, gain up to the amount of depreciation you previously claimed is taxed as ordinary income rather than at capital gains rates.⁷

Say you buy equipment for $50,000, claim $30,000 in depreciation (leaving a $20,000 adjusted basis), and sell for $35,000. The $15,000 gain is recapture, taxed as ordinary income. Only gain above the original $50,000 cost would qualify for capital gains treatment. Accelerated methods and full first-year expensing make recapture bite harder because the entire cost has already been deducted. Factor the eventual clawback into any calculation where you might sell the asset within a few years.

Where You Report It

Depreciation is reported on IRS Form 4562. You must file it whenever you place new depreciable property in service during the year, claim a Section 179 deduction, or deduct depreciation on any vehicle or listed property regardless of purchase year. Corporations other than S corporations file Form 4562 for any depreciation, including on older assets. Each business you operate gets its own Form 4562.⁸

Keep records that document each asset’s purchase date, cost, any improvements, the method and deductions taken each year, how the asset was used, and the details of eventual sale or disposal.⁹ A fixed-asset register that tracks each item from acquisition through disposition makes both annual tax preparation and any audit substantially easier.

1
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
2
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
3
eCFR. 26 CFR 1.168(d)-1 – Applicable Conventions
4
Office of the Law Revision Counsel. 26 USC 179 – Election To Expense Certain Depreciable Business Assets
5
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction
6
Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
7
Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
8
Internal Revenue Service. Instructions for Form 4562 (2025)
9
Internal Revenue Service. What Kind of Records Should I Keep