Straight-Line Depreciation: worked example
| Purchase cost | $50,000 |
|---|---|
| Salvage value | $5,000 |
| Useful life | 5.0 years |
| Yearly depreciation | $9,000 |
| Monthly depreciation | $750 |
| Total depreciable amount | $45,000 |
Straight-Line Depreciation: formula
Common error: Depreciating the full cost. Salvage value is subtracted first, so entering zero for it when the asset will resell overstates every yearly charge.
Purchase cost is the amount paid to acquire the asset and get it ready for use, including delivery and installation. Salvage value is what you expect it to be worth at the end of its useful life, which can be zero. Useful life is the number of years you expect to use it, which for tax purposes follows IRS class lives, and for your books reflects your own estimate.
Keep records of the assumptions.
Straight-Line Depreciation: changing Purchase cost
| Purchase cost | Yearly depreciation | Monthly depreciation | Total depreciable amount |
|---|---|---|---|
| $40,000 | $7,000 | $583 | $35,000 |
| $45,000 | $8,000 | $667 | $40,000 |
| $50,000 (example) | $9,000 | $750 | $45,000 |
| $55,000 | $10,000 | $833 | $50,000 |
| $60,000 | $11,000 | $917 | $55,000 |
Straight-Line Depreciation: compare input ranges
| Input | Tested from | To | Yearly depreciation: low input | Yearly depreciation: high input | Swing |
|---|---|---|---|---|---|
| Useful life | 4.0 years | 6.0 years | $11,250 | $7,500 | $3,750 (42%) |
| Purchase cost | $45,000 | $55,000 | $8,000 | $10,000 | $2,000 (22%) |
| Salvage value | $4,500 | $5,500 | $9,100 | $8,900 | $200 (2.2%) |
Straight-Line Depreciation: individual input comparisons
| Input | Value | Yearly depreciation | Monthly depreciation | Total depreciable amount |
|---|---|---|---|---|
| Purchase cost | $40,000 | $7,000 | $583 | $35,000 |
| $45,000 | $8,000 | $667 | $40,000 | |
| $50,000 | $9,000 | $750 | $45,000 | |
| $55,000 | $10,000 | $833 | $50,000 | |
| $60,000 | $11,000 | $917 | $55,000 | |
| Salvage value | $4,000 | $9,200 | $767 | $46,000 |
| $4,500 | $9,100 | $758 | $45,500 | |
| $5,000 | $9,000 | $750 | $45,000 | |
| $5,500 | $8,900 | $742 | $44,500 | |
| $6,000 | $8,800 | $733 | $44,000 | |
| Useful life | 3.0 years | $15,000 | $1,250 | $45,000 |
| 4.0 years | $11,250 | $938 | $45,000 | |
| 5.0 years | $9,000 | $750 | $45,000 | |
| 6.0 years | $7,500 | $625 | $45,000 | |
| 7.0 years | $6,429 | $536 | $45,000 |
Straight-Line Depreciation: combined input changes
| Purchase cost / Salvage value | $4,000 | $5,000 | $6,000 |
|---|---|---|---|
| $40,000 | $7,200 | $7,000 | $6,800 |
| $45,000 | $8,200 | $8,000 | $7,800 |
| $50,000 | $9,200 | $9,000 | $8,800 |
| $55,000 | $10,200 | $10,000 | $9,800 |
| $60,000 | $11,200 | $11,000 | $10,800 |
Straight-Line Depreciation: which assumptions move the result?
Straight-Line Depreciation: values and definitions
| Quantity and definition | Value used |
|---|---|
| Purchase cost | $50,000 |
| Salvage value — What the asset is expected to be worth at the end of its life. | $5,000 |
| Useful life — How many years the asset is expected to be in service. | 5.0 years |
| Yearly depreciation | $9,000 |
| Monthly depreciation | $750 |
| Total depreciable amount | $45,000 |
Straight-Line Depreciation: half and double Useful life
| Useful life | Yearly depreciation |
|---|---|
| 2.5 years | $18,000 |
| 5.0 years | $9,000 |
| 10.0 years | $4,500 |
Tax depreciation follows separate rules from book depreciation, such as MACRS class lives and Section 179 or bonus depreciation, so the amount you deduct on your tax return can differ from the figure here. Salvage value and life are estimates, and changing them changes the expense. The method ignores assets that wear faster in early years.
Business Finance calculators: Double Declining Balance Depreciation Calculator, GDP Calculator, Debt-to-Equity and Debt Ratio Calculator, Interest Coverage Ratio Calculator, Asset Turnover Calculator, Operating Margin Calculator.
Straight-line depreciation spreads the cost of an asset, less what it will be worth at the end, evenly across its life. A $50,000 machine with $5,000 salvage over five years loses $9,000 a year. The even slice makes budgets easy to forecast, but it ignores that most equipment loses value faster at first, which the double-declining method captures.
Confirm the useful life against what your tax preparer or standards use. The book life and the tax life are often different numbers.
Compare with the double-declining-balance and sum-of-years'-digits calculators, which accelerate depreciation, and the units of production page for usage-based wear. The equipment lease versus buy calculator uses depreciation in the buy decision. Check with your accountant on tax elections.
What is salvage value?
The estimated amount an asset can be sold for at the end of its useful life. It is not depreciated, so the depreciable base is cost minus salvage.
Can I change the useful life later?
Yes, as a change in estimate. The remaining book value is spread over the revised remaining life going forward.
Is straight-line depreciation used for taxes?
Tax depreciation follows the applicable asset, jurisdiction, method and election rules. IRS Publication 946 describes U.S. federal depreciation methods, including cases using straight-line treatment. This book-allocation example does not determine MACRS recovery periods, bonus eligibility or a tax election.