The straight-line method of calculating depreciation expense is the most straightforward of the alternatives. The depreciation amount is the same each year, unlike an accelerated depreciation method, which recognizes greater depreciation expense in earlier years. 

The formula to calculate straight-line depreciation is as follows:

Depreciation Expense = (Cost of Asset – Salvage Value) / Useful Life in Years

Example Straight-Line Depreciation for Book Purposes

Company Bravo, a U.S. corporation, buys a piece of equipment for $25,000 on January 1, 2022. The company wants to depreciate the asset using the straight-line depreciation method for book and U.S. federal tax purposes. The company estimates the asset’s useful life for book purposes is eight years, and the salvage value will be $3,500. 

The company’s book depreciation under U.S. Generally Accepted Accounting Principles (GAAP) is calculated as follows:

DE = ($25,000 – $3,500) / 8
DE = $2,687.50

The company’s book depreciation expense will be $2,687.50 annually for eight years. 

Example Straight-Line Depreciation Calculation for U.S. Tax

Using the same fact pattern above, the company now wants to calculate its straight-line depreciation expense for federal tax purposes. Under the Modified Accelerated Cost Recovery System (MACRS), this type of equipment has a recovery period of 7 years and is depreciable under the declining balance method.

Generally, a corporation would depreciate its eligible assets under MACRS because it provides an accelerated depreciation method. However, the corporation wants to elect out of MACRS and use straight-line depreciation instead. 

For federal tax purposes, the straight-line depreciation recovery period for this property type is seven years, and the method requires using the half-year convention, which assumes the asset is placed into service halfway through the tax year. The company estimates its salvage value for tax purposes will be zero. 

The company’s straight-line calculation for federal tax purposes is the following:

DE = ($25,000 – $0) / 7
DE = $3,571.43
1/2 years DE = $1,785.72

Although the numbers above are relatively accurate, the company should reference the depreciation tables available in IRS Publication 946 (How to Depreciate Property) for the most precise numbers. The publication includes a table for “Straight Line Method—Half-Year Convention” (S/L HY), which is used to calculate the yearly amount separately. 

Per the tables, the depreciation expense is 7.14% of the asset in years 1 and 8, 14.29% for years 2,3,5 and 7, and 14.28% for years 4 and 6. The first and last years depreciation expense is $1,785 (7.14% times $25,000). The U.S. federal tax depreciation expense for each of the eight years is as follows:

  • Year 1: $1,785
  • Year 2: $3,572.50
  • Year 3: $3,572.50
  • Year 4: $3,570
  • Year 5: $3,572.50
  • Year 6: $3,570
  • Year 7: $3,572.50
  • Year 8: $1,785

Additional Depreciation Methods

There are various depreciation methods for book purposes under US GAAP and for federal income tax reporting purposes. Not all methods apply to each authority.

Popular U.S. GAAP depreciation methods include the following:

Popular U.S. federal tax depreciation methods include the following: