For U.S. federal tax purposes, the declining balance method is an accelerated depreciation method under the Modified Accelerated Cost Recovery System (MACRS), which records larger depreciation expenses in the earlier years of an asset’s useful life.
Under MACRS, there are two forms of accelerated depreciation under the general depreciation system (GDS).
- 200% Declining Balance Method
- 150% Declining Balance Method
200% DB Method Calculation
A business calculates the declining balance rate by dividing the declining balance percentage (200%) by the number of years in the property’s recovery period. For example, for 5-year property depreciated using the 200% declining balance method, divide 2.00 (200%) by 5 years to get 0.40, or a 40% declining balance rate. 40% of the asset’s depreciable basis is claimed in the first year, which must also be adjusted for the half-year convention.
Example 200% DB Calculation
Company B, a corporation, purchases office equipment for $3,000, which is used 100% for business purposes. The corporation’s basis in the asset for depreciation is $3,000 ($3,000 times 100%). The company purchased and placed the equipment into service on April 30, 2023.
The company will depreciate the asset using the 200% DB method as a 5-year property. It calculates the first-year depreciation amount by dividing 2.00 (200%) by 5 years to get 0.40, or a 40% declining balance rate. The company calculates first-year depreciation expense as $1,200 (i.e., 40% times $3,000 basis = $1,200 expense).
Because this is the first year under the half-year convention, the adjusted first-year depreciation is $600 ($1,200 times 50%). A company can also use the 200% DB MACRS tables in IRS Publication 946 (How to Depreciate Property) to calculate the yearly depreciation expense.
Per the MACRS tables, the 5-year asset is depreciated using the following percentages for each year:
- Year 1: 20%
- Year 2: 32%
- Year 3: 19.20%
- Year 4: 11.52%
- Year 5: 11.52%
- Year 6: 5.76%
The depreciation amounts by year for the $3,000 asset are the following:
- Year 1: $600
- Year 2: $960
- Year 3: $576
- Year 4: $345.60
- Year 5: $345.60
- Year 6: $172.80
More Information
Taxpayers can reference IRS Publication 946 (How to Depreciate Property) and Form 4562 Instructions for more information on MACRS and the declining balance method of depreciation.