Depreciation Methods: Complete Guide

Choosing the right depreciation method affects your financial statements and tax liabilities. This guide compares the most common methods to help you make the right decision.

How to Choose a Method

1. Purpose

Is this for financial statements (Book) or tax filing (Tax)? Tax returns often require specific methods (e.g., MACRS in the US).

2. Asset Type

Does your asset lose value steadily (buildings) or rapidly at first (vehicles, tech)?

3. Jurisdiction

Different countries have different rules. US uses MACRS, UK uses Capital Allowances, Australia uses Prime Cost or Diminishing Value.

Methods Comparison Table

Method	Best For	Speed	Complexity	Tax Accepted
Straight Line	Buildings, Furniture, Patents	Constant	Simple	✓ Book & Tax
Double Declining	Vehicles, Technology	Accelerated	Medium	Book Only*
MACRS (USA)	All US Business Assets	Accelerated	Complex	✓ US Federal Tax
Sum of Years Digits	High Early Productivity	Accelerated	Medium	Book Only
Units of Production	Machinery, Vehicles (by miles)	Variable	Medium	Case-by-case

*DDB results may differ from tax requirements. Consult IRS Publication 946 for tax filing.

Book vs Tax Depreciation

Book Depreciation

• Used for financial statements
• Follows GAAP or IFRS standards
• Company can choose method
• Goal: Match expense with revenue

Tax Depreciation

• Used for tax returns
• Must follow IRS/local tax rules
• Method is often prescribed (MACRS)
• Goal: Minimize taxable income

Note: Book and Tax depreciation can differ, creating Deferred Tax Assets/Liabilities on your balance sheet. This is normal and expected.

Common Mistakes to Avoid

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Confusing Book and Tax depreciation, leading to incorrect tax filings

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Forgetting to account for Salvage Value in calculations

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Using wrong MACRS Convention (Half-Year vs Mid-Quarter)

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Not switching from DDB to Straight Line when beneficial

Detailed Method Guides

Straight Line Method

The simplest method with constant annual expense. Best for stable assets.

Declining Balance

Accelerated method for assets that lose value quickly in early years.

Full Comparison

Side-by-side comparison with formulas and calculation examples.

Not Sure Which Method to Use?

Try our General Calculator to compare results from different methods side by side.

Sources & References