Depreciation Methods for Properties

• When you calculate the depreciation of a property's value, the Internal Revenue Service specifies that you need to own it, that you need to use it in your business or income-producing activity, that it needs to have a determinable useful life, and that you must expect it to last more than one year. Any tangible property (except land) such as buildings, machinery, vehicles, furniture, and equipment falls into these categories. You also can calculate depreciation for certain intangible property, such as patents, copyrights, and computer software.

Straight-line Method

• The straight-line method divides the depreciation of your property into even amounts over its years of useful life. You should use this method to calculate depreciation for property that you use for business purposes only 50 percent of the time or less, property used predominantly outside the U.S., qualified restaurant property (placed in service before January 1, 2010), tax-exempt property, tax-exempt bond-financed property, farm property and imported property. Section 168 of the Internal Revenue Code has full information on this. To calculate depreciation with this method, you need to know your fixed asset's purchase price, its salvage value and its useful life. Its salvage value is how much you think your property is likely to cost at the end of its life, which can be zero or even a negative number. First, subtract the salvage value from the property's initial cost. Then, divide this difference by its useful life. The result of this calculation is the depreciation you can claim annually.

The 150 Percent Declining Balance

• The 150 percent declining balance method calculates larger amounts of depreciation for the first few years of your fixed assets' life. This method shows a decrease in the value of your properties more accurately than the straight-line method. According to the IRS document "Publication 946," use this method to depreciate all types of farm property (except real property), all 15- and 20-year property (except restaurant property placed in service before January 1, 2010) and non-farm properties with three, five, seven and 10 years of life. To calculate depreciation with this method, first determine the depreciation rate by dividing 1.5 by the years of life of your property. Next, multiply that by the asset's book value, which is the price of the asset minus the accumulated depreciation (0 for the first year). The result is your depreciation for that year. Once the depreciation with this method is lower than or equal to the depreciation with the straight-line method, the IRS allows you to change to that method.

The 200 Percent Declining Balance Method

• The 200 percent declining balance method is very similar to the 150 percent method. The difference is the 200 percent method calculates even larger amounts of depreciation early in the life of your property than the other methods do. IRS "Publication 946" indicates you can use this method for non-farm properties with three, five, seven and 10 years of life. To calculate depreciation with this method, determine the depreciation rate. In this case, divide the years of life of your property by two and multiply the result by the asset's book value. Your accumulated depreciation is also zero for the first year. Again, you may switch to the straight-line method once you get a higher depreciation with it than with this method.