How to Properly Read a Depreciation Schedule
Gain a clear financial picture by learning to read your depreciation schedule. This guide helps you track an asset's true book value and its total tax impact.
Depreciation is an accounting method for allocating the cost of a tangible asset over its useful life. A depreciation schedule is the record that tracks this expense for every fixed asset a business owns, providing the basis for claiming tax deductions. This schedule offers a clear view of the current book value of a company’s assets and is used for both accounting and tax preparation.
Key Components of a Depreciation Schedule
A depreciation schedule begins with asset identification. The “Asset Description” column provides a specific name for the item, while the “Date Placed in Service” column establishes the starting point for depreciation. This date is not the purchase date, but the day the asset was ready and available for its intended business use.
The “Cost or Basis” column represents the total investment to acquire and prepare an asset, including its purchase price, sales tax, shipping, and installation fees. For example, the basis of a new server includes its sticker price plus the cost of the technician who installed it. This total amount is the figure from which all depreciation is calculated.
The “Recovery Period” is the asset’s useful life for tax purposes, determined by its asset class under the Modified Accelerated Cost Recovery System (MACRS). The “Method” column specifies the system used, which is most often MACRS for taxes but can be another method, like straight-line, for internal bookkeeping.
“Prior Accumulated Depreciation” shows the total depreciation claimed for an asset up to the beginning of the current year. The “Current Year Depreciation” column displays the expense calculated for the present tax year. These two figures are added together to populate the “Total Accumulated Depreciation” column, reflecting the cumulative expense at the end of the current year.
The “Unrecovered Basis” or “Net Book Value” is the asset’s remaining value on the company’s books. This amount is calculated by subtracting the “Total Accumulated Depreciation” from the original “Cost or Basis.” This figure is the basis for determining gain or loss when the asset is sold and shows how much value is left to be depreciated.
Understanding Special Depreciation Entries
The Section 179 deduction allows a business to expense the full cost of qualifying equipment in the year it is placed in service, up to a specified limit. For 2025, this limit is $1,250,000, but it is reduced if total equipment purchases exceed $3,130,000. When Section 179 is used, the “Current Year Depreciation” for that asset will often equal its entire cost basis in the first year.
After this immediate expensing, the depreciation expense for that asset will be zero in all subsequent years. The schedule will show the “Total Accumulated Depreciation” as equal to the asset’s original cost basis. The “Unrecovered Basis” will drop to zero, indicating the entire value has been accounted for from a tax perspective.
Bonus depreciation also allows for expensing a percentage of an asset’s cost in its first year, but this benefit is being phased out. For assets placed in service in 2025, the rate is 40%; this rate will fall to 20% in 2026 and be eliminated in 2027. This appears as a large first-year “Current Year Depreciation” entry, and the remaining basis is depreciated over the asset’s regular recovery period. This creates a front-loaded pattern, with a large initial deduction followed by smaller ones.
Tracking Asset Disposals on the Schedule
When an asset is sold, scrapped, or retired, it must be removed from the schedule for accurate financial and tax reporting. The date of disposal is recorded, and depreciation is often calculated for the partial year up to that date. This update allows for the calculation of any financial gain or loss.
The calculation for gain or loss upon disposal uses information directly from the schedule. The asset’s “Unrecovered Basis” at the time of sale is subtracted from the sale price received for the asset. If the sale price is higher than the unrecovered basis, the difference is a taxable gain, while a lower price results in a deductible loss.
For instance, if equipment with an unrecovered basis of $5,000 is sold for $7,000, the business has a $2,000 taxable gain reported on IRS Form 4797. After the disposal is recorded, the asset is flagged as “disposed” on the schedule. This removes it from active assets for future depreciation calculations.