How to Calculate Straight-Line Depreciation

Running a business gets expensive. Luckily, you can write off your business expenses to reduce your taxable income and save money. One of the ways to maximize your write-offs is to use depreciation. This gives you the opportunity to write off expensive purchases that lose value over time. 

The most important and popular method of calculating depreciation is the straight-line method. 

This is a method for determining how much a fixed asset depreciates, or loses value, over time. The straight-line method works off a critical assumption: that there is a constant rate of depreciation. This makes it the simplest to calculate and implement in your tax strategy. 

The fundamentals are simple: you calculate how much the asset depreciates in a year, and you subtract that amount from the value of the asset every year. Imagine that on a chart; it would be linear, with a negative slope. 

And there we have the origin of the straight-line depreciation method.

How it Works

Straight-forward depreciation assumes that an asset loses the same value each year during its useful life until it reaches its rescue value. This is called scrap value, residual value or salvage value and is used to estimate the annual expenses of assets depreciation.

Straight-line depreciation uses the simplest depreciation method. When a long-term asset is purchased, it is recorded in the period of depreciation in which it was acquired as an expense. Straight-line depreciation is a method of reducing the value of an asset over a period of time until it reaches its salvage value. This is an estimate of what an asset will be worth at the end of its useful life.

To deduct the cost of depreciation, you will write down important assets in your income statement and in your company balance sheets. The salvage value (also called residual or scrap value) is an estimate of the value of the asset at the end of its useful life. The salvage value of an asset is known as such because the amount that the asset is sold as part of the cost of living of that asset is deducted from the salvage value to depreciate the total value. 

Some companies choose to use only one depreciation method to generate an after-tax cash flow advantage. It can be useful to use a double depreciation method or another depreciation method if it contains more complex formulas that lead to errors in the new depreciation. 

Straight-line depreciation is a great choice for technology assets such as computer equipment and mobile phones. Your accumulated depreciation account is a counterpart account, and it is coupled with a reduce-to-accumulated depreciation account.    

How to Calculate It

First, determine three key numbers:

1. The total purchase price of the asset. 
2. The salvage value of the asset. 
3. The useful life of the asset.

Start by subtracting the salvage value from the purchase price of the asset, then divide the sum by the useful life. This will give you the annual depreciation amount. 

Every year, you subtract this value from the asset and you get the book value. 

Write-Offs

Depreciation is counted as a business expense, meaning you can deduct that as a business write-off every year to reduce your taxable income. There are other methods of calculating depreciation, which benefit businesses depending on their revenues and the value of the asset as well as where the asset is in the process of its useful life. 

But the most effective and often simplest form of deducting these expenses is to use straight-line depreciation.