The rate of depreciation depends on three variables: what the asset cost, what it will be worth at the end of its useful life (its salvage value), and how many years you expect to use it. Once you have those numbers, finding the rate is straightforward arithmetic. The exact formula changes depending on which depreciation method you use, but the core idea is the same: spread the asset’s loss in value over the time you benefit from it.
The Three Numbers You Need First
Before you can calculate any depreciation rate, you need to pin down three inputs:
- Original cost (basis): The purchase price of the asset, plus any sales tax, shipping, and installation costs required to put it into service.
- Salvage value: What you expect the asset to be worth when you’re done using it. Companies estimate this using appraisals, a percentage of the original cost, or historical resale data for similar assets. Many businesses set salvage value at $0 when the asset will be used until it’s essentially worthless.
- Useful life: How many years the asset will contribute to your business or purpose. For tax purposes, the IRS assigns specific recovery periods (more on that below). For internal accounting, you estimate this based on how long the asset will realistically generate value. When you’re uncertain, a shorter estimate is the conservative choice.
Getting these inputs right matters more than the formula itself. A machine that costs $50,000 with a $5,000 salvage value and a 10-year life depreciates very differently from one with zero salvage value and a 5-year life, even though they started at the same price.
Straight-Line Depreciation Rate
Straight-line is the simplest and most common method. It spreads the cost evenly across every year of the asset’s life.
The formula for the annual depreciation amount is:
(Cost – Salvage Value) / Useful Life = Annual Depreciation
To express that as a percentage rate, divide 1 by the useful life. An asset with a 5-year life depreciates at 20% per year. A 10-year asset depreciates at 10% per year.
For example, say you buy equipment for $40,000, expect to sell it for $4,000 at the end, and plan to use it for 8 years. The depreciable amount is $36,000. Divided by 8 years, that’s $4,500 per year in depreciation. The straight-line rate is 12.5% (1 divided by 8).
Declining Balance Depreciation Rate
The declining balance method front-loads depreciation, giving you larger deductions in the early years and smaller ones later. This reflects how many assets lose value fastest when they’re new.
To find the rate, start with the straight-line rate and multiply it by an acceleration factor. The most common version, called double-declining balance, uses a factor of 2. So if the straight-line rate is 20% (for a 5-year asset), the double-declining rate is 40%.
Here’s the key difference: instead of applying that rate to the depreciable amount (cost minus salvage value), you apply it to the asset’s remaining book value each year. That means the dollar amount of depreciation shrinks automatically as the book value drops.
Take that same $40,000 piece of equipment with a 5-year life. The double-declining rate is 40%. In year one, depreciation is $16,000 (40% of $40,000). In year two, it’s $9,600 (40% of the remaining $24,000). In year three, $5,760. The rate stays constant, but the amount declines because the base keeps shrinking.
You stop depreciating once the book value hits the salvage value. In practice, many businesses switch from declining balance to straight-line partway through the asset’s life to ensure the full depreciable amount gets used up.
Units of Production Rate
When an asset’s wear depends more on how much you use it than on time passing, the units of production method makes more sense. Think of a delivery truck that might sit idle some years and run hard in others, or a machine that produces a measurable number of parts.
The rate per unit is:
(Cost – Salvage Value) / Total Expected Units of Production = Depreciation Per Unit
Then multiply that per-unit rate by the actual units produced (or miles driven, hours operated) in a given year. If a $100,000 machine is expected to produce 500,000 parts over its lifetime with no salvage value, the rate is $0.20 per part. A year in which it produces 80,000 parts generates $16,000 in depreciation.
IRS Recovery Periods for Tax Depreciation
For U.S. tax purposes, you don’t get to choose the useful life freely. The IRS assigns recovery periods through a system called MACRS (Modified Accelerated Cost Recovery System). Common categories include:
- 5-year property: Computers, peripheral equipment, and certain machinery (including farm equipment placed in service after 2017)
- 7-year property: Office furniture, desks, filing cabinets, safes, and general-purpose machinery and equipment
- 27.5-year property: Residential rental buildings, depreciated using the straight-line method
Under MACRS, you apply the rate to the asset’s unadjusted basis, which is the original cost reduced by any Section 179 deduction or special depreciation allowance you claimed upfront, but not reduced by regular MACRS depreciation from prior years. The IRS publishes percentage tables in Publication 946 that give you the exact depreciation percentage for each year of each property class, accounting for conventions like the half-year rule (which assumes you placed the asset in service at the midpoint of the year).
The Section 179 deduction lets businesses write off the full cost of qualifying equipment in the year it’s placed in service, up to $2,560,000 for 2026, rather than depreciating it over multiple years. This effectively gives you a 100% depreciation rate in year one for eligible property, though the benefit phases out once total equipment purchases exceed $4,090,000.
Finding the Rate for Vehicle Depreciation
If you’re trying to figure out how fast a car loses market value (as opposed to tax depreciation), the approach is different. Market depreciation isn’t governed by a formula you choose. It’s driven by mileage, age, reliability reputation, number of previous owners, service history, fuel economy, and general condition.
To calculate a vehicle’s actual depreciation rate, compare its current market value to its original price:
(Original Price – Current Value) / Original Price = Total Depreciation Percentage
Divide that percentage by the number of years you’ve owned it for an average annual rate. If you bought a car for $35,000 and it’s worth $21,000 three years later, it has depreciated 40% total, or roughly 13.3% per year on average.
In reality, cars don’t depreciate at a flat annual rate. Most vehicles lose the largest chunk of value in the first two years. Tools like Kelley Blue Book can help you find your specific vehicle’s current market value so you can run this calculation with real numbers rather than estimates.
Choosing the Right Method
The method you pick determines the rate, and the right choice depends on what you’re trying to accomplish. Straight-line works well for assets that provide roughly equal value each year, like office furniture. Declining balance suits assets that are most productive (or lose the most value) when new, like technology equipment. Units of production fits assets whose wear is usage-driven rather than time-driven.
For tax filings, the IRS generally requires MACRS, which uses a version of declining balance that automatically switches to straight-line. For internal financial statements, you have more flexibility. The goal in accounting is to match the expense to the period when the asset generates revenue, so pick the method that best reflects how the asset actually loses its usefulness to your business.