How to Create a Computer Depreciation Schedule

Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. For businesses, this process allows for the recovery of the cost of assets, like computers, as they wear out or lose value. This cost allocation is reported as an annual expense on a business’s financial statements and tax returns.

Required Information for Computer Depreciation

Before calculating depreciation for a computer, a business must gather several pieces of information. The first is the asset’s cost basis, which is the total amount invested to acquire it and prepare it for use. This includes the purchase price, sales tax, shipping charges, and any installation fees.

Another detail is the date the computer was “placed in service,” which is when it was ready and available for business use, not necessarily the purchase date. If a computer is used for both business and personal tasks, the business-use percentage must also be determined. This is calculated by tracking the time the computer is used for income-producing activities versus personal use.

The Internal Revenue Service (IRS) provides guidelines for the recovery period of assets. Under the Modified Accelerated Cost Recovery System (MACRS), computers and peripheral equipment are classified as 5-year property. This means the cost of the computer is recovered over a five-year period using the General Depreciation System (GDS).

Depreciation Calculation Methods

The most common depreciation method is MACRS. For computers, the GDS uses a 200% declining balance method, which allows for larger depreciation deductions in the earlier years of the asset’s life and smaller deductions in later years.

The Section 179 deduction allows a business to treat the cost of qualifying property, like a computer, as an immediate expense instead of depreciating it over time. The entire cost can be deducted in the year the computer is placed in service. For 2025, the maximum deduction is $1,250,000, which is reduced if total equipment purchases exceed $3,130,000. A Section 179 deduction cannot be used to create a net loss for the business.

Bonus depreciation, under Section 168(k), allows businesses to deduct a percentage of the cost of qualifying property in the first year. For property placed in service in 2025, the bonus depreciation rate is 40% as part of a scheduled phase-out. Unlike Section 179, bonus depreciation is not limited by a business’s taxable income and is automatically applied unless the business elects out. It can be used with MACRS depreciation for any remaining cost basis.

Constructing a Depreciation Schedule

A depreciation schedule is a table that tracks an asset’s depreciation over its useful life for financial reporting and tax purposes. To create one, you need columns to organize the information:

• Year
• Beginning basis of the asset
• Depreciation method and rate used
• Calculated annual depreciation expense
• Accumulated depreciation to date
• Ending asset basis for the year

For example, a business purchases a computer with a cost basis of $2,000 and places it in service during the year. Using the 5-year MACRS GDS method, the IRS provides specific percentage rates for each year of the recovery period. These rates account for a half-year convention, which assumes assets are placed in service in the middle of the year.

For the first year, the depreciation rate for 5-year property is 20%, resulting in a $400 deduction ($2,000 0.20). The schedule would show a beginning basis of $2,000, a depreciation expense of $400, and an ending basis of $1,600. In year two, the rate is 32%, leading to a $640 deduction. This pattern continues for the six years required to fully depreciate a 5-year asset under MACRS.

Reporting Depreciation on Tax Forms

Annual depreciation expense is reported on IRS Form 4562, Depreciation and Amortization. This form is used to report depreciation from all methods and must be attached to the business’s main income tax return, such as a Schedule C, Form 1120, or Form 1065.

The reporting location on Form 4562 depends on the method used. The Section 179 deduction is entered in Part I of the form, while bonus depreciation is reported in Part II.

Businesses using the standard MACRS depreciation method detail the calculations in Part III. This section requires the property’s basis, placed-in-service date, recovery period, depreciation method, and the resulting deduction. The total depreciation from Form 4562 is then carried to the business’s primary tax return as a deduction.