A Guide To The Double Declining Balance (DDB) Depreciation Method

If you’ve ever wondered why your shiny new car takes a huge value hit the first few years you own it, you’re not alone. This form of accelerated depreciation, known as Double Declining Balance (DDB) depreciation, is actually common method companies use to account for the expense of a long-lived asset.

This article will serve as a guide to understanding the DDB depreciation method by explaining how it works, why it can be beneficial, and its potential downsides.

Key Takeaways

• The DDB depreciation method causes an asset to depreciate far more quickly than it would under the straight-line depreciation method.

• The main benefit of using the DDB depreciation method is bigger tax write-offs at the beginning of the asset’s life.

• The main downsides of using the DDB depreciation method is that it’s complicated to use and earns you less money in tax deductions later on.

How Does the Double Declining Balance Depreciation Method Work?

Unlike straight-line depreciation, which dictates that an asset will experience the same amount of depreciation over the course of its lifetime, DDB depreciation will cause the asset to depreciate twice as quickly.

This method of depreciation is especially useful for assets that deteriorate more rapidly in their first few years of use, as the method will reduce deductions as the years go on. As a result, companies will typically choose to use this method of depreciation when dealing with assets that gradually lose value over their useful life.

Generally speaking, DDB depreciation rates can be 150%, 200%, or 250% of straight-line depreciation. In the case of 200%, the asset will depreciate twice as fast as it would under straight-line depreciation.

For example, let’s say that a company buys a delivery truck for $50,000 that is expected to last ten years and will have a salvage value of $5,000.

If the company chose to deduct 10% of the asset’s value each year for ten years under straight-line depreciation, the amount of depreciation per year would only change slightly. The company would deduct $4,500 in year one and $4,050 in year two.

However, if the company chose to use the DDB depreciation method for the same asset, that percentage would increase to 20%. The company would deduct $9,000 in the first year, but only $7,200 in the second year.

In this way, the company is not only saving more money, but those deductions also correlate with how rapidly the asset will decline. After all, adding thousands of miles to a delivery truck in its early years will cause it to deteriorate in value quickly.

What Is Book Value?

Initially, an asset’s book value is the original cost of the asset. However, over the course of an asset’s useful life, its book value will change each year as it depreciates. The value of each change is calculated by subtracting the amount written off from the asset’s book value on its balance sheet.

For instance, the original book value of an asset was $112,000, the year-end book value of the same asset will decrease due to depreciation. Under a 40% DDB depreciation rate, the book value of the same asset two years later would only be $40,320.

Under the DDB depreciation method, book value is an important part of calculating an asset’s depreciation, as you’ll need to know the asset’s original book value to calculate how it will depreciate over time.

The Double Declining Balance Depreciation Method Formula

To consistently calculate the DDB depreciation balance, you need to only follow a few steps.

These include:

1. Gather the initial book value of the asset (e.g., $50,000).

2. Predict an estimated useful life of the asset (e.g., ten years).

3. Calculate what the asset’s salvage value would be at the end of its useful life (e.g., $5,000).

4. Subtract the salvage value from your initial book value to begin the depreciation calculation (e.g., $50,000 – $5,000 = $45,000).

5. Assess the straight-line depreciation rate (e.g., 10% each year)

6. Calculate the annual depreciation rate using the DDB depreciation formula as shown below

Though the DDB depreciation method may seem complicated at first, the formula for calculating the rate is actually very simple. Essentially, the DDB depreciation rate will be double that of the straight-line depreciation rate, meaning that to calculate it, you need to follow this formula:

For example, if the straight-line depreciation rate is 10%, and the book value of the asset is $45,000, you would calculate the new DDB depreciation rate as such: 2 x 10% = 20% x 45,000 = 9,000. Therefore, you would deduct $9,000 for the asset’s first year of use.

Benefits of the Double Declining Balance Depreciation Method

To further understand why some companies choose to use DDB depreciation, here are a few of the benefits that come with implementing this method:

1. Complementing maintenance costs. Assets like cars, computers, or appliances degrade as they age and will inevitably require more maintenance near the end of their useful life.

   Fortunately, under the DDB depreciation method, you’ll receive a bigger tax write-off in the earlier years when maintenance is minimal while also writing off less of the value of the asset when regular maintenance becomes the norm. In this way, your annual write-offs can remain more stable and predictable over time.

2. Tax equilibrium. Every asset comes with yearly taxes, and considering the fact that an asset’s value can affect tax obligations, it’s important to get the numbers right. After all, if an asset declines over time, it will likely be producing less income near the end of its useful life.

   Luckily, under the DDB depreciation method, you can reduce the asset’s tax obligation by writing it off more early. That way, you’ll be paying less when the asset inevitably produces less income.

3. Covering upfront costs. Typically, expensive assets may require you to take out a loan or new line of credit in order to move forward with the purchase. However, deducting more with the DDB deduction method during the asset’s initial productive years can help you to make valuable repayments early on, allowing you to avoid piling interest rates.

Potential Downsides of the Double Declining Balance Depreciation Method

Though there are certainly benefits to applying the DDB depreciation method to certain assets, there are still potential downsides to consider. Before you make your decision, here’s some food for thought:

1. It can be complicated. Because there’s more math involved in calculating the DDB depreciation method, applying the formula to several assets, on top of whatever other taxes you’re already filing, can prove to be rather confusing.

   For that reason, you may have to consider hiring an accountant or putting more hours into making sure you file everything carefully and correctly.

2. Less money down the road. While it’s nice to deduct more money upfront, which can certainly help you with a new purchase, you also don’t want to regret having less money later down the line.

   For instance, if you have a rough year near the end of your asset’s useful life, you’ll be deducting significantly less money than you would have using the straight-line depreciation method.

3. It isn’t an accurate reflection of an item’s usefulness. Usually you use major assets just as much when you first get them as you do at the end of their lives, which isn’t reflected in the DDB depreciation method.

   This isn’t necessarily a problem, but it can make it more complicated to do things like accurately predict your company’s future profits and expenses.

Double Declining Balance Depreciation FAQ

For someone who isn’t engrossed in the business world, these terms and calculations may seem daunting at first. Therefore, here are helpful answers to frequently asked questions about this topic:

1. What is an accelerated method, and why is DDB depreciation considered one?

   The DDB depreciation method is considered an accelerated method because it causes higher depreciation expenses during the early years of an asset’s useful life and gradually lowers expenses as the asset ages. As such, an accelerated method is any method that follows this principle. By contrast, straight-line depreciation has rather even costs year to year.

2. What is an asset’s useful life, and how do you calculate it?

   An asset’s useful life does not necessarily predict how long the asset will last, but rather it is an estimate of how long that asset will be able to provide value and income. Generally speaking, the IRS has guides on the useful life of different assets.

3. What exactly is depreciation?

   Depreciation is an accounting method companies use to allocate and estimate an asset’s costs over the course of its useful life. Mainly for tax purposes, depreciation accounts for the way in which an asset will degrade over time.

4. What are common DDB depreciation assets?

   While there are a variety of assets that companies may choose to use DDB depreciation rates for, the most common are any assets that lose value quickly or have the potential to become obsolete — think of computers, phones, cars, trucks, and appliances.

Author

Jack Flynn

Jack Flynn is a writer for Zippia. In his professional career he’s written over 100 research papers, articles and blog posts. Some of his most popular published works include his writing about economic terms and research into job classifications. Jack received his BS from Hampshire College.