declining balance depreciation
a method of
depreciation (accounting)
, often used for income tax purposes, whereby a rate is applied to the remaining balance to derive the depreciation deduction. Compare with
accelerated depreciation
.
Example: Table 15 shows the depreciation schedule for a property with a
tax basis
of $10,000 and
depreciable life
of 5 years, using the 125% declining balance method:
|
TABLE 15
DECLINING BALANCE DEPRECIATION |
|
|
| Year |
Remaining balance |
Rate* |
Annual deduction |
| 1 |
$10,000 |
0.25
|
$2,500 |
| 2 |
7,500 |
0.25 |
1,875 |
| 3 |
5,625 |
0.25 |
1,406 |
| 4 |
4,219 |
0.25 |
1,055 |
| 5 |
3,164 |
0.25 |
791 |
* A5-year life results in 20% per year depreciation using the straight-line method. The 125% declining balance method results in an annual percentage of 25 for an asset with this life (125% of 20% = 25%).
See also
Modified Accelerated Cost Recovery System (MACRS)
provision, originally called the Accelerated Cost Recovery System (ACRS), instituted by the Economic Recovery Tax Act of 1981 (ERTA) and modified by the Tax Reform Act of 1986, which establishes rules for the depreciation (the recovery of cost through tax deductions) of qualifying assets. With certain exceptions, the 1986 Act modifications, which generally provide for greater acceleration over longer periods of time than ERTA rules, are effective for property placed in service after 1986.
Under the modified rules, depreciable assets other than buildings fall within a 3-, 5-, 7-, 10-, 15-, or 20-year class life. The 3-, 5-, 7-, and 10-year classes use the Double Declining Balance depreciation method, with a switch to straight line depreciation. Instead of the 200% rate, you may elect a 150% rate. For 15- and 20-year property, the 150% declining balance method is used with a switch to straight line. The conversion to straight line occurs when larger annual deductions may be claimed over the remaining life. Real estate uses the straight line basis. Residential rental property placed in service after December 31, 1986, is depreciated over 27.5 years, while nonresidential property placed in service between December 1, 1986, and May 13, 1993, is depreciated over 31.5 years. A 39-year period applies to nonresidential property placed in service after May 12, 1993, although certain transition rules apply.
