Declining Balance Method of Depreciation Formula

Declining balance is a form of accelerated depreciation that will depreciate more aggressively than the straight line method. This method is appropriate when an asset has higher functionality in the early years of use and becomes obsolete quickly. Declining or reducing balance methods ensure that more depreciation is accounted for in the first few years. Fixed assets like computer equipment are a good example since they are typically only used for a couple of years and then replaced.

Here is a spreadsheet showing the basic math behind a declining balance formula:

Declining Balance Method

In the example, there are 3 basic values needed to complete the calculation:

  1. Cost – the purchase price of the asset
  2. Method – 200% represents a double declining balance
  3. Years – number of years the asset will be in service

This example uses 10 years to keep the calculated numbers nice and clean but most equipment under declining balance would typically be depreciated over 3, 5 or 7 years. The spreadsheet formula in cell A7 shows one divided by the number of years to determine the straight line percentage. This value is then multiplied by a factor (declining balance percentage i.e. 125, 150, 175, 200 divided by 100) to calculate a depreciation rate. This rate is then multiplied by the remaining balance, which in the first year is the initial cost.

To continue this calculation you could enter (C4-C8)*C7 in cell C9 to calculate the second year. This formula is very similar to the one in C8 except now it calculates with the remaining balance (cost minus prior depreciation) and uses that value in place of cost. You could then continue this formula for each remaining year until the calculated annual number is less than the straight line amount, at that point and forward you can use the straight line amount until the asset is fully depreciated.

A straight line method will evenly spread the cost of an asset over its entire life while a declining balance method will result in a declining depreciation charge each year. As you can see, this calculation is much more complicated even for just a single asset record. These formulas can get very confusing when you are tracking a larger number of assets.

Let the Depre123 depreciation calculator take out the guess work. Just enter 3 simple values (Cost, Date, Class) and get all the answers. The calculator is a great way to view the depreciation results for a handful of assets. If you manage hundreds or thousands of fixed asset records then a trial of the full Depre123 application can demonstrate how to simplify the entire process of fixed asset management.

Questions? Comments? Let us know in the comments section below.

More information about Bassets eDepreciation software can be found at Bassets.net or depre123.com. At Bassets register for our live webinar, download a free evaluation copy and get a personalized pricing estimate. At depre123 try out our Free Depreciation Calculator and check out our cloud based fixed assets application.

New York Liberty Zone Depreciation

Continuing with the segment on Bonus Depreciation, this post will address depreciation rules for property in the New York Liberty Zone.  A little over eight years ago, the atrocious events of September 11 left our country devastated physically, emotionally, and economically.  With regards to the economic turmoil that ensued, particularly in the area of the World Trade Center, special provisions were made for property put into service in what is known as the New York Liberty Zone.  Below is what you need to know including the geographic boundaries of the Liberty Zone.

As stated on the IRS Supplement to Publication 946, the area defined as the Liberty Zone is property “located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York.”  For a detailed map, click here

Eligibility and Essential Info on Bonus Depreciation for Property in the Liberty Zone:


New York Liberty Zone Depreciation

1.  Qualified property must be:

  • Depreciated under MACRS with a recovery period of 20 years or less.
  • Off-the-shelf computer software (SL w/ FM at 3 years) Sect 167(f)(1)(B)
  • Water Utility property
  • Section 1250 property that rehabilitates damaged property or replaces property destroyed or condemned as a result of 9/11

2.  Additional Requirements:

  • 80% or more of the use of the property must be in the New York Liberty Zone.
  • Property must be used in the active conduct of a trade or business by the taxpayer in the Liberty Zone.
  • Original use of the property must commence on or after 9/11/01 in the Liberty Zone
  • Property must be acquired by purchase as defined in Code Section 179(d)(2) by taxpayer on or 9/11/01
  • Property must be placed in service by taxpayer on or before 12/31/06 or 12/31/09 for section 1250 property

3.  Does not qualify for Bonus Depreciation under Sect 168(k), but does qualify for a 30% Bonus Depreciation under Sect 1400L(b)(1)(A). Property that qualified under 168(k) is specifically excluded.

4.  ect 1400L(b)(1)(A) is more liberal and will cover property not eligible under Sect 168(k).  Property placed in service after 12/31/04 and before 1/1/07 may also qualify for New York Liberty Zone.

5.  Liberty Zone Bonus Depreciation is available for residential and nonresidential real property that replaces certain destroyed or condemned real property and for used property as long as the taxpayer was the first person to use the property in the New York Liberty Zone.

6.  Sect 168(k) eligible property is also eligible under New York Liberty Zone rules.

7.  Sect 179 Deduction is increased by $35,000.

8.  Mandatory MACRS ADS property disqualified

9.  Leasehold Improvement property is depreciated over 5 years with straight line and the half year convention

10  No AMT adjustment is required.  I.e., same method, convention & Rec Pd as regular tax.

We understand that the concepts around Bonus Depreciation for property in the New York Liberty Zone may be rather confusing.  Therefore, if you have any questions, or would like any further information, please state so in the comments section, or under the questions page.  Also, you may find it interesting to read Governer Pataki’s letter to bussiness owners concerning this issue here.

More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.

Basic Methods for Calculating Depreciation

There are two basic methods of depreciation to choose from when depreciating an asset.  These methods include Straight-line, and Declining Balance at either 200% or 150%.   Choosing among these methods depends on how a company wishes to receive depreciation expenses.

The Straight-Line method is generally the most commonly used method due to its simplicity and consistency of allocating depreciation evenly over the useful life of the asset.  To calculate depreciation under this method, the Cost of the Asset is reduced by the salvage or residual value to arrive at the depreciable basis.  The resulting depreciable basis is then divided by the estimated useful life.

The Double Declining Balance (200% Declining Balance) method is also commonly used, as it follows the same principles as the straight-line method, but does so at twice the rate.  Thus, if an asset has an estimated useful life of 4 years, straight-line depreciation would be at an average annual rate of 25%.  However, under this method, a 50% rate would be used.  This would be done each year until depreciation under this method is lesser than it would be under the straight line method.

Use of a 150% Declining Balance method follows the same principle as the 200% Declining Balance method, except uses 1.5 times the straight-line rate.  Thus, an average annual rate of 25% under straight-line would become 37.5% under 150% declining balance.

While the use of salvage or residual value is discussed here, please note that salvage or residual value are only used for Generally Accepted Accounting Principles (GAAP) and are not allowed for federal tax.

Choosing any of these accelerated methods has the benefit of receiving more depreciation benefits during the beginning of the asset’s useful life at the cost of receiving less later on.  However, many feel that this is more appropriate as the asset is most valuable and usable during the early stages of its life.

Here is a numerical example to illustrate the accelerated effect of double declining balance vs straight line depreciation.  For this example, consider an asset that was purchased for $1,000 with a useful life of five years.  Below are the values of depreciation determined for the five years of the asset’s life based on the two different methods:

Depeciation Calculation Using Straight-line vs 200% Declining Balance

What method(s) do you use?  We would be happy to hear what methods your company uses and any reasoning behind it.

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More information about Bassets eDepreciation software can be found at Bassets.net. While there you can set up a demonstration, download a free evaluation copy and get a personalized pricing estimate.