Double-Declining-Balance depreciation method (DDB)
method of accelerated depreciation, approved by the Internal Revenue Service, permitting twice the rate of annual depreciation as the straight-line method. It is also called the 200 percent decliningbalance method. The two methods are compared below, assuming an asset with a total cost of $1,000, a useful life of four years, and no
salvage value
.
With
straight-line depreciation
the useful life of the asset is divided into the total cost to arrive at the uniform annual charge of $250, or 25% a year. DDB permits twice the straight-line annual percentage rate-50% in this case-to be applied each year to the ndepreciated value of the asset. Hence: 50% × $1,000 = $500 the first year, 50% × $500 = $250 the second year, and so on.
| YEAR |
STRAIGHT LINE |
|
DOUBLE DECLINING
BALANCE |
|
|
Expense |
Cumulative |
Expense |
Cumulative |
| 1 |
$250 |
$250 |
$500 |
$500 |
| 2 |
250 |
500 |
250 |
750 |
| 3 |
250 |
750 |
125 |
875 |
| 4 |
250 |
1,000 |
63 |
938 |
|
$1,000 |
|
$938 |
|
A variation of DDB, called 150 percent declining balance method, uses 150% of the straight-line annual percentage rate.
A switch to straight-line from declining balance depreciation is permitted once in the asset's life-logically, at the third year in our example. When the switch is made, however, salvage value must be considered.
See also
depreciation
,
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.
