How To Calculate Depreciation (With Examples)

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How to Calculate Depreciation: A Comprehensive Guide for 2026

While many individuals opt to rely on an accountant to handle their tax matters, having a grasp of key financial concepts can greatly benefit you. Understanding depreciation not only demystifies a complex topic but also opens up opportunities for significant tax deductions.

Calculating depreciation is one of the most beneficial skills you can acquire as it directly impacts your financial strategy.

Key Takeaways:

Depreciation refers to the reduction in an asset’s value over time. For instance, a new car loses value the moment it is driven off the lot.
During tax season, you can often claim deductions on certain depreciated assets, which can substantially lower your taxable income.
There are four primary methods to calculate depreciation: the straight-line method, the double declining balance method, the unit of production method, and the sum of years’ digits method.

How to Calculate Depreciation with Examples

In This Article

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What is Depreciation?
Causes of Depreciation
The Four Ways of Calculating Depreciation
Final Thoughts
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What is Depreciation?

When you acquire an asset as a business expense, its value is not fixed; it depreciates over time due to various factors. This decline in value is what we refer to as depreciation.

Though depreciation may seem negative, it plays a crucial role during tax season. Assets that lose value throughout their useful life can be expensed or deducted from your taxable income, reflecting the reality of their diminished value.

Common examples of depreciating assets include:

Machinery used in manufacturing
Vehicles
Commercial real estate
Computers and other tech equipment

Conversely, not all purchases qualify as depreciating assets for tax purposes. Items that typically do not depreciate include:

Leased equipment
Stock investments
Land
Art and collectibles

Causes of Depreciation

Understanding the reasons behind depreciation can help clarify why assets lose value over time, even without any direct damage. Here are the three primary causes of depreciation.

Standard wear and tear. This term describes the natural deterioration of an item as it ages and is used. This type of depreciation is especially relevant for rental properties.

Examples of standard wear and tear include:
- Fading upholstery on furniture
- Minor scratches on vehicles
- Build-up of grime on machinery
Perishable items. Businesses that hold inventory of perishable goods need to account for depreciation as these items have a limited lifespan. This is particularly common in the food service industry.

Examples of perishable items include:
- Food products
- Pharmaceuticals
- Plants and flowers
Technological obsolescence. As technology evolves, equipment can quickly become outdated, impacting its value. Businesses often need to adapt to newer technologies that make older equipment less effective or even obsolete.

The Four Ways of Calculating Depreciation

With a foundational understanding of depreciation, letâ€™s explore the four primary methods for calculating it.

Straight-line method. This is the simplest method to calculate depreciation. It involves estimating the asset’s useful life and its salvage value at the end of that period. To calculate, subtract the salvage value from the original cost, and divide that number by the useful life.

For example:

Suppose you purchase a vehicle for $25,000, with an estimated lifespan of 15 years and a salvage value of $7,000. Subtracting $7,000 from $25,000 gives a depreciable cost of $18,000. Dividing $18,000 by 15 results in an annual depreciation expense of $1,200.
Double declining balance method. This method accelerates depreciation, allowing you to deduct more in the early years. To use this method, calculate the straight-line rate and double it.

Continuing with the vehicle example:

If the straight-line rate is 6.67% (1/15), the double declining rate would be 13.34%. The first year’s depreciation would be $3,334 (13.34% of $25,000), and subsequent years would apply this rate to the remaining book value.
Unit of production method. This method calculates depreciation based on actual usage rather than time. This is especially useful for assets with variable usage rates.

For example:

Assuming the vehicle is expected to last for 100,000 miles, with a salvage value of $7,000, the per-mile depreciation would be calculated by subtracting $7,000 from $25,000, resulting in $18,000, then dividing by 100,000 miles gives $0.18 per mile. If the vehicle is driven 15,000 miles in a year, the depreciation expense would be $2,700.
Sum of years’ digits method. This method also accelerates depreciation, allowing for higher deductions in the initial years. To calculate, you add together the years of an asset’s useful life and use that total to determine the annual depreciation percentage.

In the vehicle example:

For a 15-year life, the total of the digits is 120 (1+2+3+…+15). In the first year, you’d divide 15 by 120 to find a depreciation rate of 12.5%, applied to the depreciable cost of $18,000 results in a first-year depreciation of $2,250.

Final Thoughts

Grasping the concept of depreciation and its calculation is essential for modern businesses. Accurately accounting for depreciation not only aids in financial decision-making but also helps maximize tax savings during filing season.

By understanding which assets depreciate and how to effectively claim them, you can significantly improve your financial outcomes and optimize your tax strategy!

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Author

Sky Ariella

Sky Ariella is a professional freelance writer, originally from New York. She has been featured on websites and online magazines covering topics in career, travel, and lifestyle. She received her BA in psychology from Hunter College.

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