What Is the Double Declining Balance Method and Is It Right for My Business?

Imagine a 2010 Toyota Corolla with 200,000 miles on it. It’s in surprisingly good shape—clean interior, no major dents—but if someone tried to sell it to you for the same price they paid 15 years ago, you’d probably laugh. Time and wear and tear have taken their toll, and it’s no longer worth what it was. 

Depreciation is the on-paper representation of that decline in value. In business and tax accounting, it’s how you deduct the cost of your assets over time—but there’s more than one way to do it. The double declining balance method is one option, and it can be invaluable when you want to maximize your deductions upfront.

What Is the Double Declining Balance Method?

The double declining balance method, or DDB, is one of several accelerated depreciation methods. It involves writing off more of an asset’s value in the early years of its useful life. By front-loading your depreciation expense, it reduces your taxable income upfront, which may be when you need those savings the most.

Accelerated depreciation methods like DDB stand in contrast with the straight-line method, which spreads an asset’s cost evenly over its useful life. For example, a $10,000 asset with a five-year life span would be depreciated at 20%—or $2,000—per year using straight-line depreciation.

While that’s simple and predictable, it doesn’t always reflect how assets lose value in the real world. Many types of property—like vehicles, computers and manufacturing equipment—decline faster in the early years. Not only does DDB align with this reality, but it can also help generate savings during growth phases by maximizing deductions.

Double Declining Balance Method Formula

The double declining balance formula is:

Annual DDB depreciation = (2 x Straight-line depreciation rate) x Book value at the beginning of the year

To interpret the double declining balance formula, we first need to confirm the definition of a few key terms:

• Book value: An asset’s current value on paper, equal to its cost basis (typically the amount you paid for it) minus accumulated depreciation.
• Useful life: The number of years the IRS estimates an asset will remain in service for the purposes of depreciation.
• Salvage value: The estimated value of an asset at the end of its useful life. You don’t depreciate an asset’s book value below this amount.

With that clarified, we can understand the double declining balance formula. Actually, most of it is right there in the name: Under the double declining balance method, the asset “balance,” or book value, “declines” at “double” the straight-line depreciation rate.

It’s also important to note that some depreciation methods factor salvage values into their calculations, but the double declining balance method ignores it. It only comes into play at the end of an asset’s useful life.

We’ll demonstrate how this works in the next section.

Double Declining Balance Method Example

Imagine you own a $10,000 piece of equipment. According to IRS depreciation rules, its useful life is five years. We’ll assume a salvage value of $1,000.

Step 1: Calculate the straight-line depreciation rate

You can calculate an asset’s straight-line depreciation rate by dividing one by its useful life. For an asset with a five-year useful life, the straight-line depreciation rate is one divided by five, which equals 20%.

Step 2: Calculate the double declining balance depreciation rate

The double declining balance depreciation rate is simply twice the straight-line depreciation rate. In this case, that’s 20% multiplied by two, which equals 40%.

Step 3: Calculate your annual depreciation expense

To calculate your annual depreciation expense under the double declining balance method, multiply your depreciation rate by your equipment’s book value at the start of the year. Here’s how that would look:

Year 1: 40% DDB rate x $10,000 book value = $4,000 depreciation

$10,000 book value – $4,000 depreciation = $6,000 book value

Year 2: 40% DDB rate x $6,000 book value = $2,400 depreciation

$6,000 book value – $2,400 depreciation = $3,600 book value

Year 3: 40% DDB rate x $3,600 book value = $1,440 depreciation

$3,600 book value – $1,440 depreciation = $2,160 book value

Year 4: 40% DDB rate x $2,160 book value = $864 depreciation

$2,160 book value – $864 depreciation = $1,296 book value

Year 5: 40% DDB rate x $1,296 book value = $518.40 depreciation expense

$1,296 book value – $518.40 depreciation = $777.60 book value

Step 4: Account for salvage value

In this case, the full depreciation expense in year five would reduce the equipment’s book value to $777.60. However, that’s less than the estimated salvage value of $1,000, which your book value isn’t supposed to dip below.

As a result, you can’t claim the full depreciation expense. Instead, you would stop depreciating the asset partially through year five, once you had taken $296 in depreciation and reduced the asset’s book value to $1,000.

Benefits of the Double Declining Balance Method

The double declining balance method can provide significant tax advantages in the early years of an asset’s life. Accelerating depreciation reduces your taxable income sooner, freeing up funds to reinvest in growth. This often aligns with the cash flow strategies of startups and other growth-stage companies.

For example, imagine you’ve just purchased $15,000 of computer equipment for your SaaS company. The upfront investment was steep, and in your first few years, revenues are low while expenses are high.

Accelerating the computer equipment’s depreciation with the double declining balance method reduces your taxable income at a time when every dollar is precious. You could use it to extend cash runway or scale your fledgling operation, such as by hiring top talent, acquiring initial customers or developing your product.

Here are a few other scenarios where maximizing early-year deductions can create greater financial flexibility:

• Paying down financing faster to reduce lifetime interest costs
• Increasing depreciation deductions in early years without maintenance costs
• Offsetting income from assets that generate extra revenue in their first few years

Ultimately, the double declining balance method is a strategic tool for improving short-term liquidity, giving you more room to maneuver when you need it most.

Drawbacks of the Double Declining Balance Method

The double declining balance depreciation method may be a smart move during your company’s early growth years, but there are tradeoffs. For one, it’s more complex than the straight-line method, which could mean more time spent managing the books, or higher accounting fees if you’re outsourcing the work.

There’s also the natural downside of front-loading your depreciation expense: lower deductions in later years. That may be a bargain you’re willing to make, but if your income rises over time, you might wish you had more depreciation left to offset future profits.

Lastly, once you place an asset into service and start depreciating it with the double declining balance method, switching methods may not be easy. It only complicates your bookkeeping further, and you must file the surprisingly intensive Form 3115 to get IRS approval for the change, which isn’t guaranteed.

When to Use the Double Declining Balance Method

The double declining balance method is most useful when short-term savings are a priority. For example, here are a few common business scenarios where the double declining balance method may be a strategic choice:

• Asset-heavy businesses with relatively short-lived hardware, such as those with large fleets of vehicles
• Startups with high upfront costs that need to extend their runway, like those still engaging in heavy product development
• Businesses that expect profits to decrease in coming years, such as those planning to slow down after an initial launch

Meanwhile, the double declining balance method may not be the best choice for businesses with stable, long-lasting assets—often depreciated over 10 years—or those that prefer the simplicity and predictability of the straight-line method.

Your industry, tax strategy and financial trajectory should all factor into your choice of depreciation method. A qualified professional, such as a Certified Public Accountant (CPA), can help you determine which one makes the most sense.

Double Declining Balance vs. Other Depreciation Methods

Per Publication 946, the IRS requires most businesses to use the General Depreciation System (GDS) version of the Modified Accelerated Cost Recovery System (MACRS) to calculate depreciation for tax purposes.

This allows for several depreciation approaches, including the double declining balance method. Here’s how they compare:

While MACRS assigns default depreciation methods for specific property types, the IRS may let you elect a different method for certain assets using Form 4562. You must file it with your return for the year you place the asset in service.

Here are the allowable elections:

• 150% declining balance election: Instead of using the 200% declining balance method for 3-, 5-, 7-, or 10-year property, you can elect the 150% declining balance method.
• Straight-line election: Instead of using the 200% or 150% declining balance method, you can elect the straight-line method for any property.

If you decide to change your depreciation method after filing your return, you can do so by submitting an amended return within six months of the original due date.

Importantly, under MACRS rules, the 200% and 150% declining balance methods automatically switch to straight-line once that provides an equal or greater yearly deduction.

Gain Strategic Accounting Advice With Paro

The double declining balance method helps maximize early deductions and improve near-term cash flow. That can be highly beneficial for startups and other growing businesses, especially those with asset-heavy operations.

However, thoughtful planning is necessary to ensure the DDB aligns with your broader tax strategy. Paro’s accounting and bookkeeping experts can walk you through the various depreciation tactics and help you decide which one is best for your business.