Straight-line depreciation is the simplest method of calculating how much depreciation you should claim on your tax return for a capital asset worth over $1000. This lets you write off its value over time.
In this guide, you'll learn when to use straight-line depreciation, its pros and cons and how to calculate it.
What is straight-line depreciation?
Straight-line depreciation is one way to calculate depreciation. When an asset wears out or ages, it decreases in value. You can use straight-line depreciation to calculate how much of that loss of value you can record in your financial records.
It's the easiest depreciation method to use. That's because you use one formula to work out the annual amount, which stays the same every year. It's best used for assets expected to decrease steadily in value over time. IR allows you to claim an immediate tax deduction for assets under $1000 instead of claiming deductions over time.
Straight-line depreciation formula
You can use the IRD’s depreciation rate finder and calculator to find your asset’s depreciation rate. You can then use the following straight-line depreciation formula:
Asset cost x asset depreciation rate (%) = depreciation amount.
Your asset cost includes anything you spent on getting it ready for use, like shipping or assembly charges.
In the first year, if you haven't owned it for an entire year yet, you'll need to calculate the number of months you've had it. The formula then becomes:
Asset cost x (months owned / 12) x asset depreciation rate (%) = depreciation amount.
Suppose you also use the asset for personal use (like a laptop for home and business). In that case, you need to work out how much time you use it for business and multiply that percentage by the depreciation amount.
Depreciation amount x business use (%) = claimable depreciation amount.
How to calculate straight-line depreciation
To calculate straight-line depreciation, you need to know the value of your asset and its depreciation rate.
Calculate the cost of the asset
Calculate the cost of the asset by adding the amount you paid for it, excluding any GST if you're registered. Then, add any costs related to setting it up.
Find the asset's rate
Find the asset's rate using the Inland Revenue (IR) depreciation rate finder. You can search your asset by industry, such as construction, or the type of asset, like a laptop.
You'll find percentage rates for both straight-line and diminishing value – make sure you use the straight-line rate.
If your asset has no set rate, you'll need to apply for a provisional rate through IRD. You can also apply for a special rate if your circumstances mean your asset depreciates at a higher or lower rate than the calculated average.
Apply the straight-line depreciation formula
Apply the straight-line depreciation formula (cost value x rate %) to calculate the depreciation amount you can claim each year.
IR can also calculate this for you automatically when you find your rate.
When should you use straight-line depreciation?
You should use straight-line depreciation when you expect the asset to decrease in value at a steady rate.
Example of straight-line depreciation
Example of straight-line depreciation:
You buy office furniture for $3000 (excluding GST but including shipping).
The IR calculates its useful life as 10 years, and its depreciation rate as 20%, so $3000 x 0.20 = $600.
This means you claim $600 in depreciation each year for 5 years.
Advantages of straight-line depreciation
The advantages of straight-line depreciation are primarily around its simplicity, making it a good option for small businesses:
Easy to use
It's easy to use. You calculate that annual claimable amount once based on what you paid. You don't need to redo calculations every year.
Lower risk of errors
Straight-line depreciation has a lower risk of errors because the formula is easy to follow. Once calculated, the amount claimed stays the same every year.
Consistent amount
With the consistent amount you can claim yearly, there aren't any surprises or additional formulas to work out come tax time.
Disadvantages of straight-line depreciation
There are disadvantages of straight-line depreciation, especially for higher-value assets:
Does not account for an asset's actual decline in value over time
This method doesn’t account for an asset's actual decline in value over time, meaning it may lose value faster than you can claim. For example, something involving rapidly advancing technology - like computer equipment – may lose value quickly in the first few years.
Straight-line depreciation method uses guesswork
Straight-line depreciation method uses guesswork and generalised depreciation rates, which may not suit the needs of your business.
Straight-line depreciation FAQs
What is the difference between declining balance and straight-line depreciation?
The difference between declining balance (often called diminishing value depreciation) and straight-line depreciation is that diminishing value writes off a higher value in the first few years. Claimed amounts get lower over time. Straight-line depreciation means you claim the same amount every year.
What are the other methods of depreciation?
Another method of depreciation is units of production. This method calculates depreciation based on the amount of work an asset does. For example, you may buy a chainsaw with a manufacturer's estimated lifespan of 10,000 working hours. Your chainsaw will then depreciate by a specific amount with every hour it's used.
What is the simplest method of depreciation to use?
The simplest method of depreciation to use is straight-line depreciation.
Stop going around in circles – straight-line depreciation
Straight-line depreciation is the simplest method of calculating the loss in value you can claim against your assets for your business.
Because the depreciation amount is the same each time, you don't need to keep recalculating it, leaving you free to get on with your business.
Straight-line depreciation may seem complicated, but it doesn't need to be. MYOB small business accounting solutions take the stress out of the numbers. Get started today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.