Straight-line depreciation spreads an asset’s cost evenly over the years you use it: subtract the expected salvage value from the cost basis, then divide by the useful life. That gives you the same deduction every year until the asset is written down to its salvage value. The math is easy. Getting the three inputs right, following the IRS rules on recovery periods and partial-year conventions, and knowing what happens when you eventually sell is where most of the work lives.
The Formula
Annual depreciation = (Cost basis − Salvage value) ÷ Useful life
Say you buy a commercial printer for $25,000, and shipping and setup add $1,000. Your cost basis is $26,000. You estimate the printer will be worth $2,000 at the end of a five-year useful life. The depreciable base is $24,000, and dividing by five gives $4,800 in depreciation each year. Book value drops to $21,200 after year one, $16,400 after year two, and lands at the $2,000 salvage figure by the end of year five.
That predictability is the point. Unlike accelerated methods that front-load deductions, straight-line produces the same number every period, which matches assets that deliver roughly the same output year after year.
The Three Inputs
Cost Basis
Cost basis is not just the sticker price. It includes everything you paid to acquire the asset and get it ready for use: purchase price plus sales tax, freight, and installation and testing fees.1Internal Revenue Service. Publication 946 – How To Depreciate Property A $48,000 machine with $1,500 in shipping and $500 in installation has a $50,000 basis. Keep the invoices; they are what you produce if the IRS ever asks how you got there.
Salvage Value
Salvage value is what you expect the asset to be worth when you are done with it. For tax depreciation under MACRS, which most businesses use, the IRS treats salvage value as zero. For book or financial-statement depreciation, you set your own estimate based on the asset’s expected condition and market at retirement. This is one place your tax numbers and your book numbers will legitimately diverge.
Useful Life
For tax purposes, you do not pick the useful life. The IRS assigns each asset to a property class with a fixed recovery period. For book purposes, you estimate how long the asset will actually stay productive, drawing on manufacturer guidance and industry experience.
What Qualifies
To claim depreciation, the property must meet four tests: you own it, you use it in a business or income-producing activity, it has a determinable useful life, and it is expected to last more than one year.2Internal Revenue Service. Topic No. 704 – Depreciation Machinery, office furniture, vehicles, and commercial buildings typically qualify. Land does not; the statutory theory is that depreciable property wears out, becomes obsolete, or is used up, and land does none of that.3Office of the Law Revision Counsel. 26 U.S. Code 167 – Depreciation When you buy real property, you have to allocate the purchase price between the building and the land, and only the building goes on the depreciation schedule.
IRS Recovery Periods
On your tax return, assets fall into property classes under the Modified Accelerated Cost Recovery System, each with a fixed recovery period:4Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
- 5-year property: computers, peripheral equipment, automobiles, light trucks, and appliances or carpets in residential rentals.
- 7-year property: office furniture, desks, filing cabinets, and most manufacturing equipment not assigned elsewhere.
- 27.5-year property: residential rental buildings where at least 80% of rental income comes from dwelling units.
- 39-year property: nonresidential real property such as offices, stores, and warehouses.
Publication 946 has a detailed Table of Class Lives covering dozens of industry-specific categories.1Internal Revenue Service. Publication 946 – How To Depreciate Property Residential rental and nonresidential real property must use straight-line under the general system. For 5-year and 7-year property, the default is an accelerated method (200% declining balance), and straight-line is an available election.
Partial-Year Rules
Assets rarely enter service on January 1. The IRS handles first and last years through conventions rather than simple month counting.
Half-Year Convention
The default for most personal property. Whatever month you place the asset in service, the IRS treats it as though you started at the midpoint of the year, so you claim half a year of depreciation in year one and half a year in the final year.1Internal Revenue Service. Publication 946 – How To Depreciate Property The $4,800 annual figure from the printer example becomes $2,400 in year one whether you bought it in February or October.
Mid-Quarter Convention
If more than 40% of your total depreciable property for the year is placed in service during the last three months, the half-year convention does not apply. Each asset is instead treated as placed in service at the midpoint of the quarter it was actually acquired.5eCFR. 26 CFR 1.168(d)-1 – Half-Year and Mid-Quarter Conventions The rule keeps businesses from stacking December purchases and still claiming a half-year deduction.
Mid-Month Convention
Residential rental and nonresidential real property use the mid-month convention: the building is treated as placed in service at the midpoint of the month you actually start using it.1Internal Revenue Service. Publication 946 – How To Depreciate Property Close on a commercial building on March 8 and you get half a month for March plus the full remaining nine months, or 9.5 months in year one.
These conventions are federal tax rules. For internal financial statements, many businesses use simple monthly proration instead, which is another reason book depreciation and tax depreciation on the same asset often produce different numbers.
When Straight-Line Is Required
Most businesses can choose between straight-line and accelerated methods for personal property. Certain situations lock you into straight-line under the Alternative Depreciation System:1Internal Revenue Service. Publication 946 – How To Depreciate Property
- Tax-exempt use property: assets leased to governments or nonprofits.
- Tax-exempt bond-financed property: assets bought with proceeds from tax-exempt bonds.
- Property used predominantly outside the United States during the tax year.
- Listed property used less than 50% for qualified business purposes.
- Real property held by businesses electing out of the interest deduction limitation under Section 163(j).
Real property always uses straight-line under the general depreciation system as well. For a rental house or an office building, accelerated depreciation on the structure was never on the table.
First-Year Alternatives
Straight-line spreads the deduction across years. Two provisions let you take a much larger deduction up front for the same types of tangible personal property.
Section 179 lets you deduct the full cost of qualifying equipment and software in the year you place it in service. The statutory base limit is $2,500,000, and the deduction phases out dollar-for-dollar once total qualifying purchases exceed $4,000,000, with both thresholds indexed for inflation.6Office of the Law Revision Counsel. 26 USC 179 – Election To Expense Certain Depreciable Business Assets The One Big Beautiful Bill Act raised these from prior levels of $1,000,000 and $2,500,000. The Section 179 deduction cannot exceed your business’s taxable income for the year, and unused amounts carry forward.
Bonus depreciation, formally the additional first-year depreciation deduction, allows a 100% write-off of qualifying property in the year it is placed in service. The One Big Beautiful Bill Act permanently restored the 100% rate for property acquired after January 19, 2025.7Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Bonus depreciation has no dollar cap and can create a net operating loss. You can elect out of it for any class of property. Neither Section 179 nor bonus depreciation applies to real property structures, though certain interior improvements may qualify.
What Happens When You Sell
Every year of depreciation you claim reduces the asset’s adjusted basis. When you sell, the IRS compares the sale price to that reduced basis, and part of the gain often gets taxed as ordinary income rather than at capital gains rates.
For equipment, vehicles, and other personal property, the gain attributable to depreciation you previously claimed is recaptured as ordinary income.8Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property Take the printer: $26,000 basis, $24,000 depreciation claimed, $2,000 adjusted basis. Sell it for $8,000 and the $6,000 gain is ordinary income. You deducted the depreciation against ordinary income on the way in, and the IRS recovers it on the way out.
Real property gets somewhat better treatment. Because buildings depreciate straight-line, the gain attributable to that depreciation, called unrecaptured Section 1250 gain, is taxed at a maximum rate of 25%.9Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets That is above the typical long-term capital gains rate but below the top ordinary income rates.
One trap in the recapture rules: the adjusted basis reflects depreciation you claimed or were entitled to claim. Forgetting to depreciate does not spare you from recapture later.
Reporting on Your Return
Depreciation hits the federal return through two forms. Form 4562 reports annual depreciation and amortization, any Section 179 election, and information about vehicles and other listed property.10Internal Revenue Service. Instructions for Form 4562 – Depreciation and Amortization You have to file Form 4562 any year you place new depreciable property in service, claim Section 179, or report depreciation on listed property.
When you sell or dispose of a depreciated asset, the transaction goes on Form 4797, which splits the gain between ordinary income from recapture and any remaining capital gain and routes each piece to the correct line.11Internal Revenue Service. Instructions for Form 4797 – Sales of Business Property Keep a running depreciation schedule for every asset, in accounting software or a spreadsheet. That is what makes the reporting straightforward and what defends your numbers if the IRS asks about them years later.