How to Calculate Double Declining Depreciation

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According to the IRS, depreciation is a tax deduction that companies can use to "recover the cost or other basis of certain property." The publication goes on to describe depreciation as "an annual allowance for the wear and tear, deterioration, or obsolescence of the property." There are several methods for writing off depreciation, which range from standard to accelerated. Double declining depreciation is an accelerated methodology that expenses a larger portion of the asset value in the earlier years of the asset's life.

Review the calculation. The double declining balance methodology for depreciation multiples the depreciable base (book value) of the asset by an acceleration factor. The book value of an asset is the cost of the asset minus any accumulated depreciation to date.

Determine the depreciation factor. For our example, let's assume we bought a truck that cost $50,000. We want to depreciate the cost of the asset over a 5-year period. This equates to 20 percent every year if we use a straight-line depreciation method (expense the same amount every year). The factor you choose to accelerate the depreciation is your choice. Let's use 200 percent for this example; that is, we are going to accelerate depreciation of the truck by a factor of 40 percent (200% * 20%).

Calculate double declining depreciation in year 1. The depreciable base is $50,000. The depreciation expense is $20,000 ($50,000 * 0.4). Accumulated depreciation is $20,000.

Calculate double declining depreciation in year 2. The new depreciable base is $30,000 ($50,000 - $20,000). The depreciation expense is $12,000 ($30,000 * 0.4). Accumulated depreciation is $32,000 ($20,000 + $12,000).

Calculate double declining depreciation in year 3. The new depreciable base is $18,000 ($50,000 - $32,000). The depreciation expense is $7,200 ($18,000 * 0.4). Accumulated depreciation is $39,200 ($20,000 + $12,000 + $7,200).

Calculate double declining depreciation in year 4. The new depreciable base is $10,800 ($50,000 - $39,200). The depreciation expense is $4,320 ($10,800 * 0.4). Accumulated depreciation is $43,520 ($20,000 + $12,000 + $7,200 + $4,320).

Calculate double declining depreciation in year 5, the final year. The new depreciable base is $6,480 ($50,000 - $43,520). The depreciation expense is $2,592 ($6,480 * 0.4). Accumulated depreciation is $46,112 ($20,000 + $12,000 + $7,200 + $4,320 + $2,592).

Tip

The IRS suggests the Modified Accelerated Cost Recovery System (MACRS) as the correct depreciation method for property. See IRS Publication 946 in Resources for additional information.

    Tips

  • The IRS suggests the Modified Accelerated Cost Recovery System (MACRS) as the correct depreciation method for property. See IRS Publication 946 in Resources for additional information.

References

About the Author

Working as a full-time freelance writer/editor for the past two years, Bradley James Bryant has over 1500 publications on eHow, LIVESTRONG.com and other sites. She has worked for JPMorganChase, SunTrust Investment Bank, Intel Corporation and Harvard University. Bryant has a Master of Business Administration with a concentration in finance from Florida A&M University.

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