Related topics

Declining-Balance (Methods DB and DC)

Declining-Balance, Half-Year (Methods DH and DI)

Declining-Balance, Modified Half-Year (Methods DD and DE)

Depreciation Method Field

Declining-Balance Methods

Declining-balance depreciation is a method that depreciates an asset at a higher rate in the earlier years of the asset's life than straight-line depreciation. It applies only to tangible assets with a useful life equal to or greater than 3 years. According to tax law, for new assets placed in service from 1954 through 1980, declining-balance rates were allowed to a maximum of twice the straight-line rate (200%). When you enter a declining-balance method, you select the rate you want to apply.

Using declining-balance depreciation for each year of an asset's life never completely depreciates the asset. Therefore, the IRS lets you switch from declining-balance depreciation to straight-line depreciation once during the life of an asset. This switch is one of few changes in depreciation method that you can make without special IRS approval.

The application provides six standard declining-balance methods. When paired with the four possible depreciation rates (125%, 150%, 175%, and 200%), you have 24 choices.

Each method is different based on the percentage used, the averaging convention used, and whether it will switch from declining-balance to straight-line at the optimal point. The optimal point for switching to straight-line depreciation is when the deductions allowed by the straight-line method equal or exceed the deductions allowed by the declining-balance method. When the change to straight-line is made, the unrecovered basis of the asset is spread over the remaining estimated life, ensuring that the entire amount is depreciated. When straight-line depreciation is applied in this way, it is often called remaining value over remaining life depreciation. The methods are as follows:

DB

Declining-balance, midmonth convention, switch to SL when optimal.

DC

Declining-balance, midmonth convention, no switch to SL.

DD

Declining-balance, modified half-year, switch to SL when optimal.

DE

Declining-balance, modified half-year, no switch to SL.

DH

Declining-balance, half-year, switch to SL when optimal.

DI

Declining-balance, half-year, no switch to SL.

 

The application supports the following averaging conventions when using a declining-balance method:

  • Regular declining balance (midmonth convention)
  • Half-year
  • Modified half-year