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Double Declining Balance: A Simple Depreciation Guide

By Bryce Warnes on April 15, 2019

Double declining balance depreciation isn’t a tongue twister invented by bored IRS employees—it’s a smart way to save money up front on business expenses.

With the double declining balance method, you depreciate less and less of an asset’s value over time. That means you get the biggest tax write-offs in the years right after you’ve purchased vehicles, equipment, tools, real estate, or anything else your business needs to run.

Let’s dive in to how it works.

What is depreciation?

Depreciation is the act of writing off an asset’s value over multiple tax years, and reporting it on IRS Form 4562. The double declining balance method is just one way of doing that.

If you’re brand new to the concept, open another tab and check out our complete guide to depreciation. Then come back here—you’ll have the background knowledge you need to learn about double declining balance.

Double declining balance vs. the straight line method

The most basic type of depreciation is the straight line method. You use it to write off the same amount every year. So, if an asset cost $1,000, you might write off $100 every year for 10 years.

Straight Line Depreciation (Write-off amount)

On the other hand, with double declining balance depreciation, you write off a large amount right after you’ve purchased an asset, and less each year after that. So the amount you write off every year will be different.

Double declining depreciation

The double declining balance formula

Double declining balance is calculated using this formula:

2 x basic depreciation rate x book value

Basic depreciation rate

Your basic depreciation rate is the rate at which an asset depreciates using the straight line method.

To get that, first calculate:

Asset price
–––––––––––––––––
Recovery period

Asset price is what you paid for an asset. Recovery period is the period over which you’re depreciating the asset, in years.

Once you’ve done this, you’ll have your basic yearly write-off. You can use this to get your basic depreciation rate.

Basic yearly write-off
––––––––––––––
Asset price

The result is your basic depreciation rate, expressed as a decimal. (You can multiply it by 100 to see it as a percentage.) This is what percentage of the asset you depreciate each year if you use the straight line method.

Book value

Every year you write off part of an asset using double declining balance, you subtract the amount you wrote off from the asset’s book value. Starting off, your book value will be the asset price—what you paid for the asset**. **That number goes down each year, as you subtract the amount you wrote off.

When accountants use double declining appreciation, they track the total amount already depreciated in their books, right beneath where the asset it listed. If you’re calculating your own depreciation, you may want to do something similar.

Confused yet? Don’t worry—these formulas are a lot easier to understand with a step-by-step example.

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The benefits of double declining balance

There are a few benefits to the double depreciation method.

You can match maintenance costs

Some assets—vehicles, for instance—work smoothly when you first buy them, but require more maintenance over time. Luckily, that maintenance is tax-deductible. Double declining depreciation lets you get a bigger tax write-off early on, when you aren’t writing off maintenance costs.

Later, as maintenance becomes more regular, you’ll be writing off less of the asset—while writing off more in the form of maintenance. So your annual write-offs are more stable over time, which makes income easier to predict.

You can cover more of the purchase cost upfront

You get more money back in tax write-offs early on, which can help offset the cost of buying an asset. If you’ve taken out a loan or a line of credit, that could mean paying off a larger chunk of the debt earlier—reducing the amount you pay interest on for each period.

You can reduce your tax obligation when it counts

Some assets make you more money right after you buy them. (An example might be an apple tree that produces fewer and fewer apples as the years go by.) Naturally, you have to pay taxes on that income. But you can reduce that tax obligation by writing off more of the asset early on. As years go by and you deduct less of the asset’s value, you’ll also be making less income from the asset—so the two balance out.

The drawbacks of double declining depreciation

Like anything else, double declining balance has its downsides.

You’ll have to do more math, or get an accountant’s help

Bottom line—the double declining balance method is more complicated than straight line depreciation. And if it’s your first time filing with this method, you may want to talk to an accountant to make sure you don’t make any costly mistakes.

Your income may become harder to predict

If you file estimated taxes, you’re required to predict your income each year. Since the double declining balance method has you writing off a different amount each year, you may find yourself crunching more numbers to get the right amount.

You may regret taking more money upfront

If something unforeseen happens down the line—a slow year, a sudden increase in expenses—you may wish you’d stuck to good old straight line depreciation. While double declining balance has its money-up-front appeal, that means your tax bill goes up in the future. That can be tough if the extra money is sorely needed.

Example of the double declining balance method

So, you just bought a new ice cream truck for your business. Congratulations! Now you’re going to write it off your taxes using the double depreciation balance method.

The truck cost $30,000. Under IRS rules, vehicles are depreciated over a 5 year recovery period.

Step one

Figure out the basic yearly write-off for the truck.

30,000 / 5 = $6,000

Step two

Figure out the basic depreciation rate for the truck.

6,000 / 30,000 = 0.2 (or 20%)

Step three

Calculate the book value of the truck.

(Each year, you subtract the amount you depreciated over previous years from the book value. This is our first year of depreciating this asset, though, so it won’t change.)

30,000 – 0 = $30,000

Remember to do this step every year.

Step four

Enter the basic depreciation rate in the double declining depreciation formula, along with the book value for this year.

(2 x 0.2) x (30,000) = $12,000

In the first year of service, you’ll write $12,000 off the value of your ice cream truck.

Remember—you need to recalculate the book value every year. So you might as well make a note now:

30,000 – 12,000 = $18,000

Next year when you do your calculations, the book value of the ice cream truck will be $18,000.

How to plan double declining balance depreciation

For the second year of depreciation, you’ll be plugging a book value of $18,000 into the formula, rather than one of $30,000.

We won’t show the math here. But, spoiler warning: in the second year, you’ll write off $7,200. That will also be subtracted from the $18,000 book value, bringing it down to $10,800 in the third year.

Two things to note:

1- You can’t use double declining depreciation for the entire useful life of an asset. Why? Since it always charges a percentage on the base value, there will always be leftovers.

Here’s an example. Let’s say you have a bottle of really nice wine. You want to make it last, so you resolve to only drink half of the wine each day. On Monday you drink half the bottle. On Tuesday, you drink half of what’s left.

By Wednesday, you have one quarter of a bottle left. So, you drink half of that. On Thursday, you have one eighth left, and you drink half of that—so you’ve only got one sixteenth left for Friday. And so on—as long as you’re drinking only half (or 50%) of what you have, you’ll always have half leftover, even if that half is very, very small.

2- Eventually, you’ll have to switch from double declining depreciation to the straight line method. It’s the only way to make sure you depreciated all of the asset’s value—or “drink all of the wine.”

Typically, accountants switch from double declining to straight line in the year when the straight line method would depreciate more than double declining. For instance, in the fourth year of our example, you’d depreciate $2,592 using the double declining method, or $3,240 using straight line. That’s when you’d make the switch.

To get a better grasp of double declining balance, spend a little time experimenting with this double declining balance calculator. It’s a good way to see the formula in action—and understand what kind of impact double declining depreciation might have on your finances.

Ready to file your taxes? Learn how to report depreciation, one step at a time, with our guide to Form 4562.

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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