To find depreciation per unit, subtract the asset’s salvage value from its total cost basis, then divide the result by the total number of units the asset is expected to produce over its useful life. The formula is (Cost − Salvage Value) ÷ Total Estimated Units. That per-unit figure is a fixed rate you then multiply by actual output each period to get depreciation expense.
The method suits equipment whose value declines with use rather than with the calendar: delivery trucks measured in miles, printing presses measured in impressions, stamping machines measured in cycles, engines measured in hours. When output swings hard from one period to the next, tying the expense to actual usage gives a more honest cost picture than straight-line depreciation, which charges the same amount whether the machine ran flat out or sat idle.
The Three Inputs You Need Before You Calculate
The formula only works if the numbers going into it are solid. Pull three figures from your purchase records and equipment documentation before you touch the arithmetic.
Total cost basis. This is the full amount you paid to acquire the asset and get it ready to use. It includes the purchase price, sales tax, shipping, and installation. A $48,000 machine with $1,200 in freight and $800 in installation has a cost basis of $50,000.1Internal Revenue Service. Topic No. 703, Basis of Assets One detail worth checking first: the de minimis safe harbor election lets you expense items costing $2,500 or less ($5,000 if your business has audited financial statements) outright, so confirm the asset actually clears that threshold before setting up any depreciation schedule at all.2Internal Revenue Service. Tangible Property Final Regulations
Salvage value. What you expect the asset to be worth when you’re finished with it. That might be scrap value, a resale estimate based on comparable used-equipment listings, or zero if you plan to run it until it dies. Auction results and dealer listings for similar equipment give you the most defensible estimate.
Total estimated lifetime production. The manufacturer’s spec sheet usually states this as a total number of units, miles, hours, or cycles the equipment can handle before it’s worn out. A stamping press might be rated for 500,000 cycles; a truck engine for 250,000 miles. This number anchors everything, so use a realistic figure rather than the best-case number in the brochure.
Step 1: Find the Depreciable Base
Subtract salvage value from cost basis. What’s left is the depreciable base, meaning the total dollar amount that will move through your income statement as depreciation over the asset’s working life.
Take the stamping press. Cost basis of $50,000, salvage value of $5,000. The depreciable base is $45,000. Every dollar of that $45,000 will eventually be expensed. Nothing more, nothing less.
Step 2: Divide by Total Estimated Units
Divide the depreciable base by the total estimated lifetime production. The result is a fixed dollar amount per unit.3Internal Revenue Service. Publication 946, How To Depreciate Property
Sticking with the press: $45,000 ÷ 500,000 cycles = $0.09 per cycle. For a delivery truck with a $45,000 depreciable base and an estimated 200,000-mile life, the rate would be $0.225 per mile. This is your depreciation per unit. It stays locked in for the life of the asset unless your production estimate changes.
Get this number right. A small arithmetic error here compounds across every period you own the asset and can misstate profits or throw off tax filings.
Step 3: Multiply by Actual Usage Each Period
At the close of each accounting period, multiply the per-unit rate by the actual units produced, miles driven, or hours run during that period. That product is your depreciation expense.
If the stamping press completes 18,000 cycles in January, January’s depreciation is 18,000 × $0.09 = $1,620. If the truck logs 8,500 miles in a quarter, the expense is 8,500 × $0.225 = $1,912.50. You record the amount as depreciation expense on the income statement and add it to accumulated depreciation on the balance sheet, which reduces the asset’s book value.
The math is the same whether the period is a month, a quarter, or a year. In a busy year of 120,000 cycles, annual depreciation on the press is $10,800. In a slow year of 60,000 cycles, it drops to $5,400. That swing is the point: expense tracks use. And if the machine produces nothing at all in a period, the expense for that period is zero. Book value simply stays where it was until production resumes.
One hard stop: quit recording depreciation once accumulated depreciation equals the depreciable base. At that point the book value has reached salvage value, and any further deduction over-depreciates the asset. If the final period’s math would push you past that line, record only enough to bring book value down to salvage value.
Recalculating the Per-Unit Rate When Estimates Change
Equipment doesn’t always perform the way the spec sheet promised. An engineer may revise the press’s total capacity up to 600,000 cycles after seeing how it’s holding up, or drop it to 400,000 if wear is accelerating.
Under generally accepted accounting principles, a revised production estimate is a change in accounting estimate. You don’t restate prior periods. You recalculate the per-unit rate going forward using the remaining depreciable base (original depreciable base minus accumulated depreciation already recorded) divided by the remaining estimated units.
Say the press has completed 200,000 cycles and accumulated $18,000 in depreciation. The remaining depreciable base is $27,000. If the new lifetime estimate is 600,000 total cycles, remaining capacity is 400,000. The revised rate is $27,000 ÷ 400,000 = $0.0675 per cycle, applied starting the current period. Disclose the change and its current-period effect in the financial statements.
Capital improvements work the same way. When you spend money on a significant upgrade that extends the asset’s useful life or materially increases its output, the expenditure gets added to the asset’s cost basis rather than expensed on the spot.4Office of the Law Revision Counsel. 26 U.S. Code 1016 – Adjustments to Basis Routine maintenance and minor repairs stay as current-period expenses; the distinction turns on whether the work makes the asset meaningfully more productive, restores it from disrepair, or adapts it to a new use. Spend $8,000 to retrofit the press with a new motor that adds an estimated 100,000 cycles to its remaining life, and you add $8,000 to the remaining depreciable base and 100,000 to the remaining estimated units, then recalculate the rate.
A Note on Federal Taxes
The rate you calculate this way is for book depreciation. The IRS default is the Modified Accelerated Cost Recovery System (MACRS), which assigns each asset a fixed recovery period and prescribed schedule.5Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System To use units of production on your tax return instead, you have to actively elect out of MACRS by reporting depreciation for the asset on line 15 of Part II of Form 4562 and attaching a statement as described in that form’s instructions. The deadline is the due date (including extensions) of the return for the year the property is placed in service.3Internal Revenue Service. Publication 946, How To Depreciate Property
Many businesses use MACRS for tax and units of production for internal accounting, keeping two sets of depreciation records. That’s normal. Federal tax law allows depreciation as a deduction for property used in a trade or business either way.6Office of the Law Revision Counsel. 26 USC 167 – Depreciation