The double declining balance method is a declining balance depreciation method that applies twice the straight line rate to the asset’s book value at the beginning of each year. The rate stays constant while the base it runs on shrinks, so each year’s charge is computed on a smaller balance than the year before, and the method recovers more of the cost early in the life than straight line does. The same construction is also run at lower multiples of the straight line rate, and the doubling is what gives this method its name.
The Double Declining Balance Formula and Where the Rate Comes From
The rate is arithmetic on the useful life rather than a lookup, and the charge is the rate applied to what is left of the asset.
straight line rate = 1 / useful life
double declining balance rate = 2 / useful life
annual charge = rate x book value at the beginning of the yearBook value at the beginning of the year is the asset’s capitalized cost less the depreciation already recorded against it, and on the tax side the same quantity is called adjusted basis. Useful life and salvage value are both estimates rather than facts about the asset, and each carries its own regulatory definition, set out in straight line depreciation.
The doubling formula is a convention, not the rule. Under the declining balance method a uniform rate is applied each year to the unrecovered cost or other basis of the property, that rate may be determined without resort to formula, and such rate determined under section 167(b)(2) shall not exceed twice the appropriate straight line rate computed without adjustment for salvage (26 CFR 1.167(b)-2(a)). That points at a Code subsection that no longer exists, because section 167(b) now carries nothing but a cross reference to section 168 (26 U.S.C. 167(b)). This method takes its name from sitting on the ceiling that regulation sets.
The regulation runs the arithmetic itself. For a new asset with an estimated useful life of 20 years purchased for $1,000, the normal straight line rate without adjustment for salvage is 5 percent and the declining balance rate at twice the normal straight line rate is 10 percent, producing annual allowances of $100, $90 and $81 in the first three years (26 CFR 1.167(b)-2(b)).
Salvage Value Sits Outside the Computation and Under the Asset
Straight line subtracts the salvage estimate from the base before dividing. This method does not, and the same regulation says so in one breath as it puts a floor under the asset: while salvage is not taken into account in determining the annual allowances under this method, in no event shall an asset be depreciated below a reasonable salvage value (26 CFR 1.167(b)-2(a)). What the estimate is and how it is arrived at is in salvage value.
That asymmetry is what forces a stopping rule into the schedule. A constant rate cuts the remaining balance by the same proportion every year, so the balance approaches zero without ever arriving, and something has to end the schedule from outside the arithmetic. On the books that something is the salvage floor. On a tax schedule it is a mandatory switch to the straight line method, and the reason the switch is compulsory rather than elective is worked through in accelerated depreciation.
A Worked Example on Stated Inputs
Say a firm capitalizes equipment, estimates a useful life and a salvage value, and runs the method on its own books.
Cost capitalized 60,000
Estimated useful life, in years 5
Estimated salvage value 5,000
Straight line rate, 1 divided by 5 20%
Double declining balance rate, 2 divided by 5 40%
Year Book value, opening Charge Book value, closing
1 60,000 24,000 36,000
2 36,000 14,400 21,600
3 21,600 8,640 12,960
4 12,960 5,184 7,776
5 7,776 2,776 5,000
Total 55,000Each of the first four charges is the rate applied to that year’s opening book value, and each is smaller than the one before it only because the opening balance is smaller. The fifth year is where the floor binds. The rate applied to that year’s opening balance would have carried the asset below the salvage estimate, so the charge is limited to the amount that brings the carrying amount down to the estimate and no further. The five charges together recover the capitalized cost less the salvage estimate, which is exactly what a straight line schedule on the same three inputs would have recovered, arranged differently.
What the Double Declining Balance Method Is Confused With
Accelerated depreciation is the class, not the method. The double declining balance method is one member of it and the sum of the years-digits method is another, and the two are built differently, a fixed rate on a falling base against a changing fraction on a fixed base, as accelerated depreciation sets out.
The 150 percent declining balance method is the same construction at a lower setting, one and a half times the straight line rate instead of twice it (IRS, Publication 946, How To Depreciate Property). Which multiplier a tax asset gets follows from its property class rather than from a preference, and the class-by-class assignment is already tabulated in accelerated depreciation.
The tax system carries the same doubling under a different name. Except for the classes the statute puts on the 150 percent method or on straight line, its applicable depreciation method is the 200 percent declining balance method, switching to the straight line method for the first taxable year in which straight line on the adjusted basis at the beginning of that year yields a larger allowance (26 U.S.C. 168(b)(1), (2) and (3)). The words double declining balance appear nowhere in the statute. What separates the two is not the multiplier but the inputs the multiplier runs on. What that system fixes, and where a property’s class comes from, is in MACRS.
The Estimates It Runs On, and Where They Stop Being Estimates
Where the method runs on estimates, the regulation expects those estimates to move. When a change in the estimated useful life is justified, subsequent computations are made as though the revised useful life had been originally estimated, so an account carrying a ten year life and a 20 percent declining balance rate that is redetermined at the end of the sixth year to have six years left is recomputed as though the life had originally been twelve years, at 16 2/3 percent (26 CFR 1.167(b)-2(c)-2)).
Under the Modified Accelerated Cost Recovery System neither input is anyone’s estimate. Salvage value shall be treated as zero, the recovery period is read off a statutory table, and the convention is set by the statute rather than chosen (26 U.S.C. 168(b)(4), (c) and (d)(1)). The IRS records the same point in its own glossary, where salvage value is an estimated value of property at the end of its useful life, not used under MACRS (IRS, Publication 946, How To Depreciate Property).
So one asset can carry the same doubling twice over and still produce two different numbers. A schedule run on an estimated life and an estimated salvage value stops where that estimate sits; the statutory one runs the basis to zero and changes method on the way.
What Is the Difference Between Declining Balance and Double Declining Balance?
Declining balance names the construction, a constant rate applied to a shrinking base. Double declining balance names one setting of that rate, twice the straight line rate. The other settings are the same construction turned down, and the tax system uses two of them, 200% and 150% of the straight line rate, assigned by property class rather than chosen (IRS, Publication 946, How To Depreciate Property).
What Is a 5-Year 200 Percent Declining Balance Depreciation Schedule?
It is the schedule the Modified Accelerated Cost Recovery System produces for property in the 5-year class. The rate is the declining balance percentage changed to a decimal, 2.00, divided by the number of years in the recovery period, which for that class gives 40.0 percent (IRS, Publication 946, How To Depreciate Property). The half-year convention applies unless the statute substitutes another one (26 U.S.C. 168(d)(1)), and the schedule switches to the straight line method in the year that method gives the equal or greater deduction. The year that switch lands in, class by class, is in accelerated depreciation.
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