Straight-line depreciation is the simplest method for calculating depreciation over time. Under this method, the same amount of depreciation is deducted from the value of an asset for every year of its useful life. The “straight line” is literal: If you were to graph the value of your asset over time, it would appear as a straight line from the initial cost to the point where it has reached salvage value.
To apply straight-line depreciation, you need to determine your cost basis for the asset (be sure to include costs like taxes, shipping and other fees, installation, etc.). You should also have a concrete number for the estimated useful life of the asset, as well as its salvage value, if any. Then:
- You subtract the salvage value from the cost basis.
- Divide that number by the number of years of useful life.
- This will give you your annual depreciation deduction under the straight-line method.
As an example, say you bought a copy machine for your business with a cost basis of $3,500 and a salvage value of $500. Its useful life is five years. To arrive at your annual depreciation deduction, you would first subtract $500 from $3,500. Then divide that number ($3,000) by five. The result, $600, would be your annual straight-line depreciation deduction.
IRS Recovery Periods
If you’re planning to depreciate an asset for federal income tax purposes, the IRS has designated specific recovery periods for different types of depreciable assets. These range from three years for certain types of tractor units and horses – to up to 50 years for some utility properties. But for most businesses, these examples of IRS recovery periods are probably more applicable:
- Office furniture, fixtures, and equipment: 7-10 years
- Information systems, including computers and peripheral equipment: 5 years
- Light general-purpose trucks: 5 years
The IRS began to use what’s called the Accelerated Cost System (MACRS) of depreciation in 1986. Under MACRS, you have the option of two different systems of determining the “life” of your asset, the GDS (General Depreciation System) and the ADS (Alternative Depreciation System). These two systems offer different methods and recovery periods for arriving at depreciation deductions. GDS is most frequently the recommended approach to take; in Publication 946, "How to Depreciate Property" PDF (page 32), the IRS states “You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS.” Under GDS, you can opt for either the straight-line or the reducing-balance method – what the IRS terms the declining-balance method – discussed in the next section. Under ADS, your only option is to use straight-line depreciation.