Straight-line depreciation

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When a taxpayer acquires an asset, which is used for business purposes for a period of time, the Tax Code allows the company to deduct the cost of the asset over the consuming period, instead of deducting the cost at the purchasing time. This deduction over a period of time is called depreciation. The straight-line depreciation method is a type of tax depreciation that an asset owner can elect to deduct the cost of the asset over the property’s useful life evenly. By dividing the difference between an asset’s cost and its expected salvage value by the number of years the asset is expected to be used, the asset owner can get the amount of the depreciation each year. 

Example: Company spends $1000 to buy a copy machine, which is used for business purposes and has a proximate useful life of 10 years. The expected salvage value of the copy machine would be $200. To deduct the cost of the copy machine, the company should first calculate the basis of it, which is the difference of the cost and the salvage value. Therefore, the company can deduct a total of $800 over the period of 10 years. Using the straight-line method, the company needs to divide $800 by 10, and can depreciate $80 each year.

Straight-line depreciation is very commonly used by businesses, because it is fairly easy. But it has some major drawbacks. Because the useful life and the salvage value are both based on expectation, the depreciation can be very inaccurate. Moreover, this method does not factor in loss in the short-term and the maintaining cost, which can also render many inaccuracies.

Other than straight-line depreciation, there are other depreciation methods, such as the declining balance method. See here learn more about the different depreciation methods. 

[Last updated in April of 2021 by the Wex Definitions Team]