Reviewed by
Straight-line depreciation is the depreciation method most of the small- to midsize business (SMB) owners I work with (and their accountants) use on their books to spread a fixed asset's cost evenly across its useful life, recording the same expense every year until the asset's book value reaches its salvage value.
The straight-line depreciation method is the most common choice because the expense never changes from year to year, which makes it easy to budget and record, and it fits the long-term assets that lose value to ordinary wear and tear at a steady pace. Every asset your business buys, from delivery vehicles to office furniture, drops in value over time, and this is the simplest way to track that loss.
Below, you can calculate your annual depreciation, see the formula and a year-by-year schedule, and check the useful life the IRS assigns to different asset types.
Straight-Line Depreciation Calculator
Enter your purchase price, salvage value, and useful life to see the annual depreciation for each year the asset is in service.
Straight-Line Depreciation Formula
The straight-line depreciation formula uses three inputs: the asset cost, its salvage value, and its useful life.
Annual depreciation expense =
(Cost of the asset - Salvage value) / Useful life
The amount you actually depreciate is the depreciable base: the asset cost minus its salvage value. Cost includes what you paid to get the asset ready for use, so purchase price plus any shipping, taxes, and installation. Salvage value, also called residual value or scrap value, is what you expect the asset to be worth at the end of its useful life.
Say you buy a machine for $15,000, expect it to be worth $3,000 when you're done with it, and plan to use it for five years. Subtract $3,000 from $15,000 for a $12,000 depreciable base, divide by five, and you depreciate $2,400 a year. That works out to a depreciation rate of 20% (1 divided by the 5-year life) applied to the depreciable base each year.
How To Calculate Straight-Line Depreciation
Find the cost basis: Add the purchase price to any shipping, taxes, and installation costs needed to put the asset in service.
Estimate the salvage value: Decide what the asset will be worth at the end of its useful life.
Subtract to get the depreciable base: Cost basis minus salvage value is the amount you'll depreciate.
Divide by the useful life: Split the depreciable base evenly across the number of years you'll use the asset.
Record it each year: Expense that same amount annually until book value reaches the salvage value.
Straight-Line Depreciation by Asset Class
The IRS assigns a recovery period to each class of property under the Modified Accelerated Cost Recovery System (MACRS), and most businesses use those periods as their useful life estimate. Here are the recovery periods for common business assets, with a straight-line example for each:
| Asset type | Useful life (Years) | Example (cost, salvage) | Annual straight-line depreciation |
|---|---|---|---|
| Business vehicles (cars, light trucks, vans) | 5 years | $40,000 cost, $8,000 salvage | $6,400 |
| Computers and office machinery | 5 years | $6,000 cost, $600 salvage | $1,080 |
| Office furniture and fixtures | 7 years | $7,000 cost, $700 salvage | $900 |
| Commercial buildings (nonresidential) | 39 years | $780,000 cost, $0 salvage | $20,000 |
Source: IRS Publication 946
Real property, like a commercial building, is depreciated with no salvage value, so the figure above reflects the full depreciable cost divided across the recovery period. Residential rental property runs on a 27.5-year period.
Building a Depreciation Schedule
A depreciation schedule tracks the asset's value year by year, so you can see the running total of depreciation and what the asset is still worth on your books. Using the $40,000 vehicle above, with $8,000 salvage value and a five-year life, the $6,400 annual expense builds up like this:
| Year | Beginning book value | Depreciation expense | Accumulated depreciation | Ending book value |
|---|---|---|---|---|
| 1 | $40,000 | $6,400 | $6,400 | $33,600 |
| 2 | $33,600 | $6,400 | $12,800 | $27,200 |
| 3 | $27,200 | $6,400 | $19,200 | $20,800 |
| 4 | $20,800 | $6,400 | $25,600 | $14,400 |
| 5 | $14,400 | $6,400 | $32,000 | $8,000 |
By the end of year five, accumulated depreciation equals the $32,000 depreciable base, and the ending book value lands exactly on the $8,000 salvage value. Accountants record each year's expense with a journal entry that debits depreciation expense and credits accumulated depreciation, a contra-asset account that offsets the asset's cost on your balance sheet. The expense itself flows through your income statement, so straight-line depreciation touches all three financial statements and keeps your financial reporting consistent. Because it's a non-cash charge, it's added back on the cash flow statement.
Straight-Line vs. Other Depreciation Methods
Straight-line is one of four depreciation methods businesses commonly use. The other three are forms of accelerated depreciation that front-load the expense into the early years, or usage-based methods that tie it to how much you run the asset:
Straight-line
Spreads cost evenly across the useful life, best for assets that lose value at a steady pace
Double-declining balance
Takes larger deductions in the early years, for assets that lose value fast, like technology
Sum-of-the-years'-digits
Another accelerated method that weights more of the expense toward the early years
Units of production
Ties depreciation to actual output or usage instead of the passage of time
Straight-line wins on simplicity and works for the majority of business assets. Accelerated methods can make sense when an asset does most of its earning early or loses value quickly, but they take more effort to track.
When To Use Straight-Line Depreciation
Straight-line depreciation fits assets that lose value at a steady, predictable rate, which covers most of what a small business owns, like:
Buildings
Office furniture and fixtures
General equipment
Vehicles you'll drive for years
It's also the method the IRS requires under its Alternative Depreciation System for certain property. Accountants use it first because the even, repeatable expense is easy to record and hard to get wrong.
If the asset you're depreciating is one you still need to buy, its cost and useful life also affect your financing. Equipment financing can spread the purchase across a term that roughly matches the asset's useful life, and you can estimate the payment with our equipment loan calculator before you commit. For a broader cash need or a shorter-lived asset, a short-term business loan or asset-based lending can free up capital while you put the equipment to work.
Minimum Qualifications
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
Put Your Depreciation Numbers To Work
Once you know an asset's depreciable cost and useful life, straight-line depreciation gives you a repeatable expense for your books and taxes, plus a clear read on what the asset is worth each year. If buying that asset is the next step, financing it is quick, and you can apply online in about two minutes. Apply today to get matched with equipment financing without a ding to your credit.
Straight-Line Depreciation FAQ
These are answers to a few common questions business owners ask me about straight-line depreciation.
How Do You Calculate Straight-line Depreciation?
Subtract the asset's salvage value from its cost to get the depreciable base, then divide by the useful life in years. The result is the same depreciation expense you record every year until book value reaches salvage value. The calculator above runs that math for you.
What Is the Formula for Straight-Line Depreciation?
(Cost of the asset - salvage value) / useful life = annual depreciation expense. Cost is what you paid to get the asset in service, salvage value is what it's worth at the end, and useful life is how many years you'll use it.
What Are the Four Types of Depreciation?
Straight-line, the double declining balance method, sum-of-the-years' digits, and units of production. Straight-line spreads the cost evenly across the useful life, while the other three either front-load the expense as accelerated depreciation or tie it to how much you use the asset.
What is Straight-Line Depreciation for Five Years?
For a five-year asset, you divide the depreciable base by five and record that amount each year for five years. A $15,000 asset with a $3,000 salvage value depreciates $2,400 a year ($12,000 divided by 5) until its book value reaches the $3,000 salvage value.
Michael Baynes
Co-founder, Clarify
Michael has over 15 years of experience in the business finance industry working directly with entrepreneurs. He co-founded Clarify Capital with the mission to cut through the noise in the finance industry by providing fast funding and clear answers. He holds dual degrees in Accounting and Finance from the Kelley School of Business at Indiana University. More about the Clarify team →
Related Posts
