Depreciation Methods Explained: Straight-Line, Declining Balance, and More
Tax Strategy · 2025-12-28 · 6 min
Depreciation converts a large capital expenditure into annual tax deductions over the asset useful life. The method you choose affects your tax bill. Here is how each method works.
When you buy a $10,000 piece of equipment, you cannot deduct the full amount in the year of purchase (with some exceptions). Instead, you spread the deduction over the asset useful life — typically 3-7 years for equipment, 27.5 years for residential rental property, and 39 years for commercial property. This spreading is depreciation.
Straight-line depreciation is the simplest: divide the cost by the useful life. A $10,000 asset with a 5-year life gives you $2,000 in deductions each year. The deduction is the same every year, making it easy to predict and plan around.
Declining balance depreciation front-loads the deduction. The 200% declining balance method (also called double declining balance) deducts 40% of the remaining balance each year on a 5-year asset. Year one: $4,000. Year two: $2,400. Year three: $1,440. This puts more of the deduction in the early years when the asset is newest and most productive.
Section 179 and bonus depreciation allow you to deduct the full cost of qualifying assets in the year of purchase. Section 179 has an annual limit and applies to specific asset types. Bonus depreciation has been phasing down. Both are powerful tools for reducing tax liability in the year of a major purchase — consult your accountant for current limits and phase-out schedules.
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