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Depreciation Calculator

Annual depreciation equals cost minus salvage value divided by useful life

Solution

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Straight-Line Depreciation

Spreads cost evenly over useful life.

D = (C − Sₙ) ÷ n

Depreciation Basis

Total depreciable amount: cost minus salvage.

DB = C − Sₙ

Constant Percentage

Fixed fraction applied to depreciable basis each period.

D = DF × (C − Sₙ)

How It Works

Straight-line depreciation spreads cost evenly over useful life. The basis is cost minus salvage. The constant percentage method applies a fixed fraction each period, front-loading depreciation.

Example Problem

A truck costs $45,000 with $5,000 salvage after 8 years.

  1. Write the depreciation-basis formula: DB = C − S_n.
  2. Substitute the truck's values: DB = 45,000 − 5,000 = 40,000.
  3. Write the straight-line formula: D = (C − S_n) / n.
  4. Substitute the depreciable basis and useful life: D = 40,000 / 8.
  5. Compute annual depreciation: D = 5,000 per year.
  6. Book value after 5 years is original cost minus accumulated depreciation: 45,000 − (5 × 5,000) = 20,000.

After 5 years, book value is $20,000.

Key Concepts

Depreciation allocates the cost of a tangible asset over its useful life. The depreciable basis is always cost minus salvage value. Straight-line depreciation spreads this evenly across all periods. The constant percentage method applies a fixed fraction each period, front-loading more expense into earlier years — useful when assets lose value quickly at first (vehicles, electronics).

Applications

  • Tax accounting: calculating annual depreciation deductions for business equipment and property
  • Financial reporting: allocating asset costs on income statements and balance sheets per GAAP/IFRS
  • Capital budgeting: estimating after-tax cash flows that include depreciation tax shields
  • Asset management: tracking book value of fleet vehicles, machinery, and building improvements

Common Mistakes

  • Depreciating land — land does not wear out and is never depreciated; only improvements (buildings, paving) are depreciable
  • Forgetting to subtract salvage value — the depreciable basis is cost minus salvage, not the full purchase price
  • Using the wrong useful life — IRS Publication 946 specifies recovery periods (e.g., 5 years for computers, 39 years for commercial buildings)
  • Confusing constant percentage with declining balance — constant percentage uses a fixed fraction of the original basis, while declining balance applies the rate to the remaining book value

Frequently Asked Questions

What is the formula for straight-line depreciation?

The straight-line formula is D = (cost − salvage value) / useful life. If an asset costs $30,000, has $3,000 salvage, and lasts 9 years, annual depreciation is ($30,000 − $3,000) / 9 = $3,000.

What is straight-line depreciation used for?

Straight-line depreciation is the most common method for financial reporting because it spreads the depreciable cost evenly across the asset's useful life.

How long do you depreciate rental property?

Residential rental buildings are depreciated over 27.5 years and commercial buildings over 39 years. Land itself is never depreciated.

What is salvage value?

Salvage value is the estimated resale, scrap, or disposal value of the asset at the end of its useful life. It reduces the depreciable amount.

What is depreciation basis?

Depreciation basis is the portion of cost that can actually be depreciated, calculated as cost minus salvage value. It is the total amount to be allocated over the asset's life.

What is the constant percentage depreciation method?

It applies a fixed fraction to the depreciable basis each period, front-loading expense into earlier years compared with straight-line depreciation.

Why does depreciation matter in capital budgeting?

Depreciation reduces taxable income, which creates a tax shield and changes after-tax project cash flows. That makes it important in engineering economics and investment analysis.

Reference: Newnan, Donald G., et al. Engineering Economic Analysis. Oxford University Press.

Depreciation Formulas

This calculator covers three common depreciation relationships: straight-line depreciation, depreciation basis, and a constant-percentage method.

Straight-Line

D = (C − S_n) / n

Basis

DB = C − S_n

Constant Percentage

D = DF × (C − S_n)

  • C = asset cost
  • S_n = salvage value at the end of useful life
  • n = useful life in years
  • D = depreciation amount
  • DB = depreciation basis
  • DF = constant-percentage depreciation fraction

Worked Examples

Equipment Accounting

What is annual straight-line depreciation on a $60,000 machine with $6,000 salvage over 9 years?

  • D = (C − S_n) / n
  • D = (60,000 − 6,000) / 9
  • D = 6,000

Property Basis

If an asset costs $85,000 and salvage value is $10,000, what is the depreciation basis?

  • DB = C − S_n
  • DB = 85,000 − 10,000
  • DB = 75,000

Front-Loaded Method

With DF = 0.25, cost $48,000, and salvage $8,000, what is constant-percentage depreciation?

  • D = DF × (C − S_n)
  • D = 0.25 × (48,000 − 8,000)
  • D = 10,000

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