How to Calculate Depreciation on Equipment: Methods and MACRS Rules

To calculate depreciation on equipment, pick one of four methods and apply it to the asset’s cost basis, salvage value, and useful life. Straight-line spreads the cost evenly across the years. Declining balance front-loads the deduction. Sum-of-the-years’-digits accelerates it on a fixed fraction schedule. Units of production ties the expense to how much you actually run the machine. For a federal tax return, most of that choice is made for you: the IRS requires the Modified Accelerated Cost Recovery System (MACRS), which pairs a prescribed method with an assigned recovery period.

The Three Inputs Every Method Needs

Every formula starts with the same three numbers. Get one wrong and the deduction is wrong for every remaining year of the asset’s life.

Cost basis is your total investment to get the equipment operational: purchase price plus sales tax, shipping, installation, testing fees, and anything else required to put the asset into service.¹ A $45,000 CNC machine with $2,000 in freight and $3,000 in installation has a cost basis of $50,000.

Salvage value is what you expect the equipment to be worth when you’re done with it, whether as scrap, trade-in, or resale. The depreciable amount is cost basis minus salvage value, so overestimating salvage means smaller annual deductions. One important exception: under MACRS for tax purposes, salvage value is treated as zero by statute, so this input only matters for book depreciation.²

Useful life is how many years you expect to use the asset productively. For book purposes you estimate it yourself. For tax, the IRS assigns recovery periods by property class: five years for office machinery and computers, seven years for office furniture, three years for certain tractor units, and 15 years for land improvements like fences and sidewalks.³ Publication 946 lists dozens of asset types with their assigned periods.

A boundary worth naming up front: land never depreciates because it doesn’t wear out or become obsolete, and inventory held for sale isn’t depreciable either. Clearing, grading, and landscaping costs are treated as part of the land itself, not as a separate depreciable asset.³

Straight-Line Depreciation

Straight-line is the simplest method and the one most businesses use for financial statements. The formula produces the same expense every year:

Annual Depreciation = (Cost Basis − Salvage Value) ÷ Useful Life

Say you buy a printing press for $55,000, expect to sell it for $5,000 after five years, and assign it a five-year useful life. The depreciable base is $50,000. Divide by five and you get $10,000 per year. The book value drops by that same $10,000 each year until it reaches the $5,000 salvage value.

The appeal is predictability. Expense is identical every period, which makes budgeting straightforward and gives auditors little to question. The drawback is that it doesn’t reflect reality for equipment that loses most of its value in the first couple of years, like computers or vehicles.

Declining Balance Method

Declining balance front-loads depreciation by applying a fixed percentage to the asset’s remaining book value each year. Because the book value shrinks, so does the annual expense.

The most common version is double declining balance (200% DB). To get the rate, divide one by the useful life and multiply by two. For a four-year asset, straight-line would be 25%, so the double declining rate is 50%.

Take a $40,000 tractor with a four-year life and $4,000 salvage value:

Year 1: 50% × $40,000 = $20,000 expense (book value drops to $20,000)
Year 2: 50% × $20,000 = $10,000 expense (book value drops to $10,000)
Year 3: 50% × $10,000 = $5,000 expense (book value drops to $5,000)
Year 4: Only $1,000 is deducted, bringing book value to the $4,000 salvage floor

Notice what happens in Year 4. The formula would produce $2,500 (50% of $5,000), but that would push book value below salvage. You stop at salvage value and take only the remaining amount. This is a common error point. Always check whether the calculated expense would breach the salvage floor before recording it.

The 150% Variant

A less aggressive version uses 150% of the straight-line rate. Under MACRS, the IRS requires 150% declining balance for 15-year and 20-year property such as land improvements and municipal infrastructure. The 200% rate applies to shorter-lived property in the 3-year through 10-year classes.² You can elect 150% DB for shorter-lived property if you want a gentler schedule, though most businesses don’t.

Sum-of-the-Years’-Digits Method

This accelerated method produces a unique fraction for each year. The denominator is the sum of all the digits in the useful life. For a five-year asset: 5 + 4 + 3 + 2 + 1 = 15. The numerator starts at the highest digit and drops by one each year.⁴

Apply each fraction to the depreciable base. On a $30,000 depreciable base over five years:

Year 1: 5/15 × $30,000 = $10,000
Year 2: 4/15 × $30,000 = $8,000
Year 3: 3/15 × $30,000 = $6,000
Year 4: 2/15 × $30,000 = $4,000
Year 5: 1/15 × $30,000 = $2,000

The total adds exactly to $30,000, the full depreciable base. Unlike declining balance, this method always fully depreciates the asset to its salvage value, so there’s no method switch and no salvage floor to watch. The annual expense declines in a smoother curve than double declining balance.

Units-of-Production Method

When wear depends on how heavily you use a machine rather than how many calendar years pass, units of production is the better fit. It works in two steps:

Step 1: Depreciation per Unit = (Cost Basis − Salvage Value) ÷ Total Estimated Lifetime Units

Step 2: Annual Depreciation = Depreciation per Unit × Units Produced That Year

A manufacturing robot with a $100,000 depreciable base rated for 200,000 lifetime units has a per-unit rate of $0.50. Produce 30,000 units in Year 1 and you record $15,000 in depreciation. A slower Year 2 at 10,000 units means only $5,000.

This method suits equipment with uneven usage patterns: seasonal machinery, delivery vehicles tracked by mileage, or injection molds rated for a specific number of cycles. The tricky part is estimating lifetime output accurately. Underestimate and you’ll fully depreciate the asset while it’s still running; overestimate and you’ll have undepreciated cost sitting on the books when the machine is scrapped.

How MACRS Changes the Math on Your Tax Return

The four methods above describe the underlying math, but for federal tax returns most businesses don’t choose freely. The IRS requires MACRS, which pairs a specific depreciation method with an assigned recovery period and timing convention.³ Under the General Depreciation System (the version most businesses use):

3-, 5-, 7-, and 10-year property: 200% declining balance, switching to straight-line when that produces a larger deduction
15- and 20-year property: 150% declining balance, switching to straight-line
Residential rental and nonresidential real property: straight-line over 27.5 or 39 years

Most equipment lands in the 5-year or 7-year class. Office machinery and computers are 5-year property; office furniture and fixtures are 7-year property.³ Salvage value is treated as zero, so you depreciate the entire cost basis.²

MACRS also dictates when depreciation starts. You don’t simply begin depreciating on the date you buy the equipment. The default for personal property is the half-year convention: all equipment placed in service during the year is treated as if placed in service at the midpoint, so you take half a year of depreciation in the first year and the other half in a partial year after the recovery period ends. A mid-quarter convention kicks in if more than 40% of your total depreciable property for the year is placed in service in the last three months, in which case each asset is treated as placed in service at the midpoint of its quarter.⁵

Section 179 and Bonus Depreciation: Skipping the Schedule

Sometimes the best depreciation calculation is no gradual calculation at all. Two provisions let you deduct the full cost of qualifying equipment in the year you buy it.

Section 179 lets you deduct up to $2,500,000 of qualifying equipment cost as an immediate expense in the year it’s placed in service. The deduction phases out dollar-for-dollar once your total qualifying purchases for the year exceed $4,000,000.⁶ These statutory amounts are adjusted for inflation each year; for 2026, the limits are approximately $2,560,000 and $4,090,000. Qualifying property includes tangible personal property like machinery, vehicles, computers, and off-the-shelf software. New and used both qualify, as long as you acquire it by purchase for use in the active conduct of your business. The asset must be used more than 50% for business, and mixed use reduces the deduction proportionally.⁷

Bonus depreciation works alongside or instead of Section 179. The One Big Beautiful Bill Act permanently restored 100% first-year bonus depreciation for qualifying property acquired and placed in service after January 19, 2025, with no sunset date. It has no dollar cap, applies automatically unless you elect out, and doesn’t require the property to be used more than 50% for business (though personal-use assets still aren’t eligible). It covers tangible property with a recovery period of 20 years or less. Businesses that expect a higher tax bracket in later years can elect out on a class-by-class basis and spread the deductions instead.

Why the Book Number and the Tax Number Won’t Match

The depreciation on your financial statements and the depreciation on your tax return will often be different numbers for the same asset. That’s normal.

Book depreciation follows generally accepted accounting principles. You choose a method, usually straight-line, based on the asset’s actual expected useful life, and you subtract estimated salvage value. Tax depreciation follows MACRS: the IRS assigns the period and method, and salvage is zero. Because MACRS accelerates the expense and often uses shorter periods than an asset’s real useful life, tax depreciation runs higher than book depreciation in the early years and lower later on. Take Section 179 or bonus depreciation and the gap widens further: you may fully expense the asset for tax in Year 1 while still depreciating it on the books for five or seven years. The mismatch is a timing difference, not a permanent one. Total depreciation over the asset’s life is the same either way.

One consequence to keep in mind: if you sell the equipment for more than its depreciated tax basis, the IRS recaptures the depreciation you claimed and taxes that portion of the gain as ordinary income rather than at capital gains rates under Section 1245.⁸ Aggressive first-year expensing lowers your adjusted basis, which raises the recapture exposure if you sell sooner than expected.

Reporting on Form 4562 and Keeping Records

Businesses report depreciation on Form 4562, which is required whenever you place new depreciable property in service, claim a Section 179 deduction, or report depreciation on any vehicle or other listed property. The form asks for property classification, date placed in service, cost basis, recovery period, convention, and method for each asset.⁷

Depreciation records outlast most other business documents. The IRS requires you to keep records related to depreciable property until the statute of limitations expires for the year you dispose of the asset, not the year you bought it.⁹ In practice, that means holding onto purchase invoices, installation receipts, and depreciation schedules for the entire ownership period plus at least three years after disposal. Underreport income by more than 25% and the retention period extends to six.

Getting the initial inputs right matters more than getting the method right. An error in cost basis or recovery period compounds across every year of the asset’s life and can trigger accuracy-related penalties if it produces an underpayment.¹⁰ When in doubt about which property class an asset belongs to, the appendix tables in Publication 946 are the definitive reference.

1
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
2
Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
3
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
4
eCFR. 26 CFR 1.167(b)-3 – Sum of the Years-Digits Method
5
IRS.gov. Depreciation – Frequently Asked Questions
6
Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
7
Internal Revenue Service. Instructions for Form 4562 (2025)
8
Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets
9
Internal Revenue Service. How Long Should I Keep Records?
10
Internal Revenue Service. Penalties