What is a Tax Depreciation Schedule?

Marsha A. Tisdale

The cost of purchasing business assets may be deducted over the useful life of the asset through a variety of depreciation methods. A tax depreciation schedule is a table that shows what amount may be deducted each year of the asset’s tax life. Some of the tax depreciation methods can be complicated, and the tax depreciation schedule allows a taxpayer to easily recognize the allowable deduction for each tax year.

Woman holding a book
Woman holding a book

In essence, a tax depreciation schedule is an accounting tool that helps to determine the tax basis, or value of a specific asset. The amount subtracted each year from the tax basis of an asset may be based on how much time the asset has been used or on how much the asset was used during that time period. At the end of its pre-determined tax life, an asset may be fully depreciated, meaning the tax basis has been reduced to zero, or there may be a salvage, or residual, value.

Depreciation methods include straight-line depreciation, declining-balance depreciation, and a variety of activity-based depreciation methods. In straight-line depreciation, the total value of the asset is divided by the number of years for its tax life. The declining-balance method accelerates the amount of depreciation in the beginning years and decreases each year. Activity-based methods are calculated by how much the asset is used during each reporting period. Examples of this method would include depreciation based on how many units of product is produced or how many miles a vehicle has been driven.

A tax depreciation schedule would indicate what percentage of the remaining value to deduct each year based on the tax life classification of the asset. For example, a five-year asset with a straight-line depreciation method would show a deduction of 20 percent of the total value each year. One of the declining-balance methods uses a rate double that of straight-line depreciation. The tax depreciation schedule displays what percentage of the total value per year should be deducted based on the number of useful years.

For example, for a five-year asset, under the double-declining-balance method the rate would be 40 percent, or twice that of the straight-line method. The calculation is complicated by two factors. A half-year depreciation is allowed the first and last year of depreciation, and each year the 40 percent is subtracted from what the remaining balance was the previous year.

Taxpayers can more easily determine the allowable depreciation expense for an asset by referring to a tax depreciation schedule. In the United States, the tax life classifications are based the tax depreciation system established by the Internal Revenue Service (IRS). The current system used in the United States is called the Modified Accelerated Cost Recovery System, and the tax depreciation schedules pertaining to this system is found on the IRS website. 

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