Depreciation Methods: Which One Should You Use?
Quick answer: Depreciation is process of spreading cost of a fixed asset over its useful life. The four main depreciation methods are straight-line (equal amounts each year), double declining balance (accelerated front-loading), MACRS (IRS-required method for tax), and units of production (based on usage). For book purposes under GAAP, most businesses use straight-line. For tax purposes, IRS requires MACRS. Your books can use one method while your tax return uses another.
Depreciation is one of adjusting entries that gets skipped most often during close, right alongside prepaid expenseamortization. No vendor sends you a depreciation bill. No bank feed imports it. If someone doesn't manually record it (or set up automation to do it), it simply doesn't appear in your books.
The result: your fixed assets are overstated on balance sheet, your expenses are understated on income statement, and your net income is inflated. Every month you skip depreciation, distortion compounds.
This guide covers methods of depreciation, formulas and calculations for each one, when to use which method, and how they work in QuickBooks Online.
What depreciation is (and isn't)
Investopedia defines depreciation as an accounting method of allocating cost of a tangible asset over its useful life. It's not about an asset losing market value. It's about matching cost of asset to periods that benefit from using it.
A $60,000 delivery vehicle doesn't provide value only in year you buy it. It provides value for five or six years. Depreciation spreads that $60,000 over useful life so each year's income statement reflects a portion of cost.
Three things depreciation is not:
Not a cash expense. No money leaves bank. Depreciation is a non-cash adjusting entry that reduces asset value on balance sheet and increases expense on income statement.
Not a decline in market value. A building might appreciate in market value while being depreciated on books. Depreciation is an accounting allocation, not a valuation.
Not optional. Under GAAP, depreciable assets must be depreciated. Skipping it means your financial statements don't comply with accounting standards.
The depreciation formula: three inputs
Every depreciation method uses some combination of these three inputs:
Depreciable base = Cost minus Salvage Value = $60,000 minus $5,000 = $55,000
That $55,000 is total amount that gets depreciated over asset's life. How it gets spread across years depends on depreciation method you choose.
The four methods of depreciation
1. Straight-line depreciation
The simplest and most common method of depreciation for book purposes. It allocates same amount of depreciation expense to each year of asset's useful life.
Formula:
Annual Depreciation = (Cost - Salvage Value) / Useful Life
Example: $60,000 vehicle, $5,000 salvage, 5-year life.
Annual Depreciation = ($60,000 - $5,000) / 5 = $11,000 per year
Monthly Depreciation = $11,000 / 12 = $916.67 per month
After Year 5, asset is fully depreciated. The net book value equals salvage value ($5,000). No more depreciation is recorded.
When to use straight-line: For book reporting under GAAP. Most startups use straight-line for all fixed assets on their financial statements because it's simple, predictable, and easy to explain to investors.
2. Double declining balance (DDB)
An accelerated depreciation method that front-loads expense. More depreciation in early years, less in later years. The idea is that some assets (vehicles, technology) provide more value early in their life.
Formula:
Annual Depreciation = 2 x (1 / Useful Life) x Beginning Book Value
The "double" means twice straight-line rate. For a 5-year asset, straight-line rate is 20% (1/5). The DDB rate is 40% (2/5).
Example: Same $60,000 vehicle, $5,000 salvage, 5-year life.
*Year 4 is capped so book value doesn't drop below salvage value ($5,000). The calculated amount would be $5,184, but only $7,960 remains ($12,960 - $5,000), so that's depreciation recorded.
When to use DDB: When you want to front-load expense for book purposes (matching higher costs to early high-value years). Less common for startups, more common for businesses with heavy equipment or vehicles.
3. MACRS (Modified Accelerated Cost Recovery System)
MACRS is depreciation method IRS requires for tax purposes. It's not optional for tax filing. MACRS uses predetermined recovery periods and depreciation rates published by IRS.
MACRS assigns each asset type a recovery period:
MACRS uses its own declining balance percentages (published in IRS Publication 946), not straight-line or DDB formulas above. The IRS provides percentage tables for each recovery period. For example, 5-year MACRS property uses these percentages:
Notice: MACRS depreciates to $0 (no salvage value), and 5-year property actually takes 6 calendar years to fully depreciate because of half-year convention (assumes asset was placed in service mid-year).
When to use MACRS: For tax filing. Always. The IRS requires it for most tangible property placed in service after 1986. Your CPA uses MACRS on tax return even if your books use straight-line. The difference between book depreciation and tax depreciation creates a temporary timing difference.
4. Units of production
Depreciation based on actual usage rather than time. The more you use asset, more depreciation you record.
Formula:
Depreciation per Unit = (Cost - Salvage Value) / Total Estimated Units
Period Depreciation = Depreciation per Unit x Units Used in Period
Example: A $100,000 printing press expected to produce 500,000 units over its life, with $10,000 salvage value.
Depreciation per unit = ($100,000 - $10,000) / 500,000 = $0.18 per unit
If press produces 80,000 units in Year 1: $0.18 x 80,000 = $14,400 depreciation
When to use units of production: For assets where usage varies significantly year to year (manufacturing equipment, vehicles billed by mile, machinery). Uncommon for startups. Common in manufacturing and logistics.
Section 179 and bonus depreciation (tax accelerators)
The IRS offers two ways to accelerate depreciation beyond MACRS for tax purposes. These are tax deductions, not book methods. Your financial statements still use straight-line (or whatever GAAP method you've chosen). The tax benefit is separate.
Section 179 deduction
Section 179 lets you deduct full cost of qualifying property in year it's placed in service, instead of depreciating it over multiple years. For tax years beginning in 2026, maximum Section 179 deduction is $2,560,000, with a phaseout starting at $4,090,000 in total property placed in service.
For startups, Section 179 is most commonly used for: computers, office furniture, vehicles (limited to $32,000 for SUVs in 2026), and software.
Bonus depreciation
Bonus depreciation (also called special depreciation allowance) lets you deduct a percentage of asset's cost in Year 1, on top of regular depreciation. For qualified property acquired and placed in service after January 19, 2025, allowance is 100%. This effectively lets you expense entire asset in Year 1 for tax purposes.
Your CPA decides whether Section 179 or bonus depreciation is more advantageous based on your taxable income, total asset purchases, and business structure.
Book depreciation vs. tax depreciation
This confuses founders. You can (and usually do) use different depreciation methods for your books and your tax return.
The difference between book and tax depreciation creates a temporary timing difference. You might depreciate an asset over 5 years on books but deduct full amount in Year 1 for tax (via Section 179). The total depreciation over asset's life is same. The timing is different. Your CPA handles reconciliation on tax return.
How to record depreciation in QuickBooks Online
The monthly depreciation adjusting entry in QBO:
Depreciation Expense goes on income statement. Accumulated Depreciation goes on balance sheet as a contra-asset (it reduces net book value of fixed assets).
Set it up as a recurring journal entry. In QBO, go to Settings > Recurring Transactions > New > Journal Entry. Set frequency to monthly and enter accounts and amounts. QBO will post entry automatically each month.
Track each asset class separately. Create sub-accounts under Depreciation Expense in your chart of accounts (e.g., "Depreciation - Computers," "Depreciation - Furniture") and matching sub-accounts under Accumulated Depreciation. This lets you see depreciation by asset type on balance sheet reconciliation.
Depreciation mistakes that mess up close
Not recording it at all. The most common. Fixed assets sit on balance sheet at full cost forever. Expenses are understated. Net income is inflated.
Using wrong useful life. A laptop with a 3-year useful life depreciated over 7 years understates monthly expense and overstates asset's book value. Research IRS guidelines or industry standards for useful life estimates.
Forgetting to stop at fully depreciated. Once accumulated depreciation equals depreciable base (cost minus salvage), stop recording. Continuing to depreciate a fully depreciated asset creates negative book value, which shouldn't happen.
Not adding new assets to schedule. A $5,000 laptop purchased in June that doesn't get added to depreciation schedule until December means 6 months of missed depreciation.
How Finlens automates depreciation
Finlens automates depreciation as part of month-end close workflow. Set up asset (cost, salvage value, useful life, method, start date) and monthly depreciation entries post automatically. When assets are fully depreciated, entries stop. When new assets are added, schedule updates.
For bookkeepers managing multiple clients, this eliminates manual tracking spreadsheet and risk of missed entries. The depreciation data feeds directly into balance sheet reconciliation so fixed asset balances are always verifiable.
FAQ
What are methods of depreciation?
The four main methods of depreciation are: straight-line (equal amounts each period), double declining balance (accelerated, front-loaded), MACRS (IRS-required for tax), and units of production (based on actual usage). Most businesses use straight-line for books and MACRS for tax.
What is straight-line depreciation?
Straight-line depreciation allocates same amount of expense to each year of an asset's useful life. Formula: (Cost - Salvage Value) / Useful Life. It's simplest method and most common for financial reporting under GAAP.
What is MACRS depreciation?
MACRS (Modified Accelerated Cost Recovery System) is depreciation method required by IRS for tax purposes. It assigns each asset type a recovery period (5, 7, 27.5, or 39 years) and uses IRS-published percentage tables to calculate annual depreciation. MACRS depreciates assets to $0 (no salvage value).
What is Section 179?
Section 179 lets you deduct full cost of qualifying property in year it's placed in service, up to $2,560,000 for tax years beginning in 2026. It's a tax deduction, not a book method. Your financial statements still use regular depreciation.
Can I use different methods for books and taxes?
Yes. Most businesses use straight-line for book reporting (GAAP) and MACRS for tax filing (IRS). The difference creates a temporary timing difference that your CPA reconciles on tax return. This is normal practice.
How often should depreciation be recorded?
Monthly, as part of close. Set up recurring journal entries in QBO so depreciation posts automatically each month without manual intervention. Depreciation entries should be posted before bank reconciliation is finalized and period is locked.
