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IRS.gov Website
Publication 534
taxmap/pubs/p534-006.htm#en_us_publink100043664

Methods To Use(p8)

rule
Two methods of depreciation are the straight line and declining balance methods. If ACRS or MACRS does not apply, you can use one of these methods. The straight line and declining balance methods discussed in this section are not figured in the same way as straight line or declining balance methods under MACRS.
taxmap/pubs/p534-006.htm#en_us_publink100043665

Straight Line Method(p8)

rule
Before 1981, you could use any reasonable method for every kind of depreciable property. One of these methods was the straight line method. This method was also used for intangible property. It lets you deduct the same amount of depreciation each year.
To figure your deduction, determine the adjusted basis of your property, its salvage value, and its estimated useful life. Subtract the salvage value, if any, from the adjusted basis. The balance is the total amount of depreciation you can take over the useful life of the property.
Divide the balance by the number of years remaining in the useful life. This gives you the amount of your yearly depreciation deduction. Unless there is a big change in adjusted basis, or useful life, this amount will stay the same throughout the time you depreciate the property. If, in the first year, you use the property for less than a full year, you must prorate your depreciation deduction for the number of months in use.
taxmap/pubs/p534-006.htm#en_us_publink100043666

Example.(p8)

In April 1994, Frank bought a franchise for $5,600. It expires in 10 years. This property is intangible property that cannot be depreciated under MACRS. Frank depreciates the franchise under the straight line method, using a 10-year useful life and no salvage value. He takes the $5,600 basis and divides that amount by 10 years ($5,600 ÷ 10 = $560, a full year's use). He must prorate the $560 for his 9 months of use in 1994. This gives him a deduction of $420 ($560 × 9/12). In 1995, Frank can deduct $560 for the full year.
taxmap/pubs/p534-006.htm#en_us_publink100043667

Declining Balance Method(p8)

rule
The declining balance method allows you to recover a larger amount of the cost of the property in the early years of your use of the property. The rate cannot be more than twice the straight line rate.
taxmap/pubs/p534-006.htm#en_us_publink100043668

Rate of depreciation. (p8)

rule
Under this method, you must determine your declining balance rate of depreciation. The initial step is to:
  1. Divide the number 1 by the useful life of your property to get a straight line rate. (For example, if property has a useful life of 5 years, its normal straight line rate of depreciation is 1/5, or 20%.)
  2. Multiply this straight line rate by a number that is more than 1 but not more than 2 to determine the declining balance rate.
Unless there is a change in the useful life during the time you depreciate the property, the rate of depreciation generally will not change.
taxmap/pubs/p534-006.htm#en_us_publink100043669

Depreciation deductions. (p8)

rule
After you determine the rate of depreciation, multiply the adjusted basis of the property by it. This gives you the amount of your deduction. For example, if your adjusted basis at the beginning of the first year is $10,000, and your declining balance rate is 20%, your depreciation deduction for the first year is $2,000 ($10,000 × 20%). To figure your depreciation deduction in the second year, you must first adjust the basis for the amount of depreciation you deducted in the first year. Subtract the previous year's depreciation from your basis ($10,000 − $2,000 = $8,000). Multiply this amount by the rate of depreciation ($8,000 × 20% = $1,600). Your depreciation deduction for the second year is $1,600.
As you can see from this example, your adjusted basis in the property gets smaller each year. Also, under this method, deductions are larger in the earlier years and smaller in the later years. You can make a change to the straight line method without consent.
taxmap/pubs/p534-006.htm#en_us_publink100043670

Salvage value.(p8)

rule
Do not subtract salvage value when you figure your yearly depreciation deductions under the declining balance method. However, you cannot depreciate the property below its reasonable salvage value. Determine salvage value using the rules discussed earlier, including the special 10% rule.
taxmap/pubs/p534-006.htm#en_us_publink100043671

Example.(p8)

If your adjusted basis has been decreased to $1,000 and the rate of depreciation is 20%, your depreciation deduction should be $200. But if your estimate of salvage value was $900, you can only deduct $100. This is because $100 is the amount that would lower your adjusted basis to equal salvage value.
taxmap/pubs/p534-006.htm#en_us_publink100043672

Income Forecast Method(p8)

rule
The income forecast method requires income projections for each videocassette or group of videocassettes. You can group the videocassettes by title for making this projection. You determine the depreciation by applying a fraction to the cost less salvage value of the cassette. The numerator is the income from the videocassette for the tax year and the denominator is the total projected income for the cassette. For more information on the income forecast method, see Revenue Ruling 60-358 in Cumulative Bulletin 1960, Volume 2, on page 68.