Construction Equipment Depreciation Explained
Ever wondered how your construction equipment’s value changes over time? As you put your gear to work, it naturally loses value from everyday use.
But it’s not just wear and tear—new technologies and evolving standards can make older equipment less valuable.
Depreciation might sound like just another accounting term, but it has real implications for your bottom line. Understanding how depreciation works, how to record it, and how it impacts your finances can make a big difference for your business.
In this article, we’ll dive into the essentials of equipment depreciation, reveal the best methods for tracking it, and explore how it affects your overall financial health.
What Is Depreciation?
Depreciation is the allocation of a fixed asset cost over its useful life. Since there’s no direct way to determine the exact amount of depreciation, accountants use estimates instead. The estimated depreciation expense doesn’t reflect the “actual cost” of the fixed asset’s deterioration or decrease in value.
As a construction company, depreciation plays an important part in how you value your assets and report the cost allocated to expenses. Depreciation can help reduce your tax dues. That’s why maximizing every penny of depreciation can yield higher tax savings.
Useful Lives
The useful life of an asset is the main basis for how depreciation is allocated. Regardless of your chosen method, the computation will always include the useful life. Determining useful life can be based on experience. If you have owned similar assets in the past, you can use the valuable lives of those assets. But if you want to be more definite, you can use the IRS’ prescribed useful lives for different types of fixed assets as an alternative.
Depreciation under MACRS
The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method that accelerates the depreciation of fixed assets during their first few years. Its goal is to give higher tax benefits in the earlier years when the asset is expected to be used in daily operations.
Under MACRS, you can choose between the General Depreciation System (GDS) or the Alternative Depreciation System (ADS).
- Under GDS, you can select the following depreciation methods: straight-line method, double-declining balance method, and 150% declining balance method. The recovery periods under GDS are shorter than in ADS, resulting in higher depreciation deductions in the earlier years.
- Under ADS, you can only select the straight-line or double-declining methods. The recovery periods under ADS are longer than in ADS, resulting in a more even depreciation deduction.
As a construction business, it’s your choice whether you pick ADS or GDS for construction equipment depreciation. If you want higher tax benefits, pick GDS because it has shorter recovery periods. Otherwise, picking ADS gives you longer depreciation deductions for longer periods.
Depreciation Methods
The first three depreciation methods below are the allowed depreciation for tax purposes. However, for general knowledge, we’ve included a depreciation method also used as an alternative to the declining balance methods.
Straight-line Method
The straight-line method is by far the easiest depreciation method. It is a uniform depreciation method throughout the fixed asset’s useful life. Under this method, you report the same depreciation expense every year until the end of the asset’s useful life.
The formula for this method is:
Straight-line Depreciation = (Cost - Residual Value) ÷ Useful Life
The residual value is the amount you expect to sell a fully depreciated asset. However, you can set it to zero if it has no salvage value.
For example, let’s assume the following information:
- Cost: $100,000
- Residual Value: $20,000
- Useful Life: 20 years
The depreciation expense under the straight-line approach is:
Depreciation Expense = ($100,000 - $20,000) ÷ 20 years = $4,000
Double-declining Balance Method
The double-declining balance (DDB) method is a depreciation method that reports higher depreciation in earlier years. To determine the DDB rate, we simply multiply the straight-line rate by 200%, as shown in the formula below:
Straight-line Rate = 1 ÷ Useful Life
DDB Rate = (1 ÷ Useful Life) x 200%
In the first year, the DDB method may report twice the depreciation under the straight-line approach. Let’s use the same data from the previous section to illustrate.
DDB Rate = (1 ÷ 20 years) x 200% = 10%
DDB Depreciation, Year 1 = $100,000 x 10% = $10,000
150% Declining Balance Method
Like the DDB, the 150% declining balance method follows the same process. Instead of multiplying the straight-line rate by 200%, we multiply it by 150%.
Straight-line Rate = 1 ÷ Useful Life
150% Declining Rate = (1 ÷ Useful Life) x 150%
The 150% declining balance method is less aggressive than DDB. Let’s use the data again.
150% Declining Rate = (1 ÷ 20 years) x 150%
150% Declining Rate = 7.5%
150% Declining Depreciation, Year 1 = $100,000 x 7.5% = $7,500
Sum-of-the-years Digits Method
The sum-of-the-years digits (SYD) method is also an accelerated method that uses the sum-of-the-years as the denominator for the depreciation computation. We compute it as:
n = n(n +1) ÷ 2
So, for a five-year life, the sum of the years digits is 15. The formula above provides convenience, so you don’t have to manually add all numbers like 5+4+3+2+1 just to arrive at 15.
SYD, Year 1 = 5/15 x $100,000 = $33,333
Our Final Thoughts on Construction Depreciation
Depreciation isn’t just a technical detail—it’s a powerful tool for reducing your taxable income and saving money in the long run. At Atlas Accounting Group, we’re here to help your construction business make the most of depreciation tax deductions and plan effectively for the future.
If you need extra support with depreciation or have questions about the process, our team is ready to assist. Head over to our Getting Started page and book a call to explore how we can help you maximize your savings.
Until next time!
