Depreciation: How to Calculate, Useful Life Table and Impact on Income Tax
Depreciation is one of the most important concepts in business accounting — and one of the most ignored by beginning entrepreneurs. It directly impacts the company's accounting profit, tax burden and equipment replacement planning. Correctly calculating depreciation can mean a legal and significant reduction in the company's Income Tax.
Use our Depreciation Calculator to automatically calculate in any method.
What is Depreciation?
Depreciation is the loss of value of a fixed asset over time, as a result of physical wear and tear, technological obsolescence or the mere passage of time. It is recorded in accounting as an operating expense, reducing profit without representing an effective cash outflow.
Depreciation affects:
- The balance sheet (reduces the value of fixed assets)
- The DRE (recorded as an operating expense)
- Cash flow (not cash outflow — it's a "tax shield" that reduces income tax)
- IR/CSLL (deductible expense, reduces the tax calculation basis)
Assets Subject to Depreciation
Only fixed assets (physical, tangible) with a useful life of more than 1 year are depreciated:
| Subject to Depreciation | Not Subject to Depreciation |
|---|---|
| Vehicles, machinery and equipment | Land (does not wear out) |
| Buildings and improvements | Works in progress |
| Computers and IT | Stocks |
| Furniture and fixtures | Intangible goods with an indefinite useful life |
| Long lasting tools | Biological assets (specific cases) |
Useful Life Table and Depreciation Rate (Federal Revenue — IN 1,700/2017)
The IRS sets annual depreciation rates for tax purposes. The rate indicates how many years the asset is fully depreciated:
| Type of Good | Useful Life | Annual Fee | Example |
|---|---|---|---|
| Aircraft | 10 years | 10% | Corporate jets |
| Working animals | 5 years | 20% | Horses, oxen |
| Buildings | 25 years | 4% | Buildings, warehouses |
| Facilities | 10 years | 10% | Electrical and hydraulic networks |
| Industrial machines (general) | 10 years | 10% | Lathes, presses |
| Light machines | 5 years | 20% | Tools |
| Furniture and fixtures | 10 years | 10% | Tables, chairs |
| Passenger vehicles | 5 years | 20% | Company cars |
| Trucks and buses | 4 years | 25% | Commercial fleets |
| Computers and peripherals | 5 years | 20% | PCs, notebooks |
| Vessels | 10 years | 10% | Boats, speedboats |
| Improvements to third-party properties | Contract term | Variable | Rental renovations |
Important: The company can use different rates in corporate financial statements (CPC 27), but for tax deduction purposes, it must follow the Federal Revenue rates.
Method 1: Linear Depreciation (Constant Quota Method)
It is the simplest and most used method in Brazil. Depreciation is the same throughout the useful life of the asset.
Formula:
Annual Depreciation = (Acquisition Cost − Residual Value) / Useful Life in Years
Or using the rate:
Annual Depreciation = Acquisition Cost × Depreciation Rate
Example: Vehicle worth $80,000 with 5 years of useful life
Taxa anual = 20%
Depreciação anual = R$ 80.000 × 20% = R$ 16.000/ano
Depreciação mensal = R$ 16.000 / 12 = R$ 1.333,33/mês
| Year | Annual Depreciation | Accumulated Depreciation | Book Value |
|---|---|---|---|
| 1 | $ 16.000 | $ 16,000 | $ 64.000 |
| 2 | $ 16,000 | $ 32.000 | $ 48,000 |
| 3 | $ 16.000 | $ 48,000 | $ 32.000 |
| 4 | $ 16,000 | $ 64.000 | $ 16,000 |
| 5 | $ 16.000 | $ 80,000 | $ 0 |
Method 2: Declining Balance (Accelerated Depreciation)
Depreciation is greatest in the early years and decreases over time. It better reflects the wear and tear of technological assets or heavy machinery.
Formula:
Depreciation_t = Book Value at the Beginning of the Period × Rate
Example: $100,000 machine, 20% rate, decreasing balance method:
| Year | Initial Book Value | Rate | Depreciation | Final Value |
|---|---|---|---|---|
| 1 | $ 100.000 | 20% | $ 20,000 | $ 80.000 |
| 2 | $ 80,000 | 20% | $ 16.000 | $ 64,000 |
| 3 | $ 64.000 | 20% | $ 12,800 | $ 51.200 |
| 4 | $ 51,200 | 20% | $ 10.240 | $ 40,960 |
| 5 | $ 40.960 | 20% | $ 8,192 | $ 32,768 |
Note: With pure decreasing balance, the good never reaches zero. In practice, the combination "Declining Balance with change to Linear" is used when the linear depreciation exceeds that of the declining balance.
Method 3: Sum of Digits of Years (SDA)
Considers depreciation over the remaining years of the asset's useful life.
Formula:
Sum of Digits = n × (n + 1) / 2
Depreciation_year_t = (Useful Life − t + 1) / Sum of Digits × Depreciable Value
Example: Asset worth $50,000, useful life 5 years:
Soma dos dígitos = 5 + 4 + 3 + 2 + 1 = 15
| Year | Fraction | Depreciation | Book Value |
|---|---|---|---|
| 1 | 5/15 = 33.33% | $ 16.667 | $ 33.333 |
| 2 | 4/15 = 26.67% | $ 13.333 | $ 20,000 |
| 3 | 3/15 = 20.00% | $ 10.000 | $ 10,000 |
| 4 | 2/15 = 13.33% | $ 6.667 | $ 3,333 |
| 5 | 1/15 = 6.67% | $ 3.333 | $ 0 |
Incentivized Accelerated Depreciation
The IRS allows accelerated depreciation in certain cases:
| Situation | Acceleration |
|---|---|
| Use in 2 daily shifts | Rate × 1.5 (50% more) |
| Use in 3 daily shifts | Rate × 2.0 (100% more) |
| Goods from the IT sector (Law 11,196/2005) | 100% in the year of acquisition (special regime) |
| Machines and equipment for innovation | Rate accelerated by decree |
Example: Machine in two shifts
A machine with a normal rate of 10%/year used in 2 shifts:
- Accelerated rate = 10% × 1.5 = 15% per year
- Effective useful life: 100% / 15% ≈ 6.7 years (vs 10 years normal)
Impact of Depreciation on Income Tax
Depreciation is a deductible expense in Real Profit — reduces the IRPJ (25%) and CSLL (9%) calculation basis:
Example of Tax Savings:
| Item | No Depreciation | With Depreciation of $ 50.000 |
|---|---|---|
| Lucro antes dos tributos | $ 500,000 | $ 500.000 |
| Despesa de depreciação | $ 0 | − $ 50.000 |
| Lucro tributável | $ 500,000 | $ 450.000 |
| IRPJ (25%) | $ 125,000 | $ 112.500 |
| CSLL (9%) | $ 45,000 | $ 40.500 |
| Total IR + CSLL | $ 170,000 | $ 153.000 |
| Economia fiscal | — | $ 17,000 |
The depreciation of $ 50.000 gerou uma economia tributária de $ 17,000 — 34% of the depreciated value. This is the combined rate of IRPJ + CSLL in Real Profit.
In Presumptive and Simple National Profit: Depreciation is not deductible from the federal tax calculation base. The tax benefit only exists for companies in Lucro Real.
Residual Value
The residual value is the value that the asset will have at the end of its useful accounting life (scrap, resale or market value). Depreciation is calculated on the depreciable value = Cost − Residual Value.
If the company cannot estimate the residual value, zero is adopted as the standard — the asset is depreciated to zero.
Frequently Asked Questions (FAQ)
1. What is the difference between accounting and tax depreciation?
Accounting depreciation (CPC 27) follows the company's estimated economic useful life of the asset. Tax depreciation follows the rates set by the Federal Revenue Service (IN 1,700/2017). The two can be different. The company records accounting depreciation in the DRE, but only deducts tax depreciation from IR (limited to Federal Revenue rates, except in special regimes).
2. Does land depreciate?
No. Land has an indefinite useful life and does not suffer wear and tear through use — therefore, it is not depreciated under Brazilian legislation. When a company acquires land with a building, it must separate the costs: the land does not depreciate, the building depreciates at a rate of 4% per year (25 years).
3. Can a company car be depreciated?
Yes. Passenger vehicles have a tax useful life of 5 years (rate of 20% per year). For IR purposes, expenses on mixed-use vehicles (personal and commercial) have deduction limitations. Exclusively commercial vehicles (representatives, deliveries) are fully deductible.
4. What depreciation rate do computers and notebooks have?
The tax depreciation rate for computers and peripherals is 20% per year (useful life of 5 years) according to the standard Federal Revenue table. Under the special IT regime (Law 11,196/2005), IT assets can be depreciated at 100% in the year of acquisition, generating maximum immediate tax savings.
5. What happens when an asset is fully depreciated and is still in use?
The asset continues to be recorded in fixed assets at its residual value (or $0 if there is no estimated residual value). It continues to be used operationally, but no longer generates depreciation expense. In corporate accounting, this may underestimate the real value of the asset if the asset still has a market value.
6. How to account for the sale of a depreciated asset?
The difference between the sales value and the book value (cost minus accumulated depreciation) is recorded as result on disposal of assets — it can be a gain or loss. If the sales value is greater than the book value, it is a taxable gain. If smaller, it is a deductible loss.
Calculate the Depreciation of Your Asset
Use our Depreciation Calculator to:
- Calculate annual and monthly depreciation in any method
- Generate the complete depreciation table
- Calculate tax savings in Real Profit
Related calculators:
- Profit Margin Calculator — calculate the profitability of the business
- Income Tax Calculator — simulate the company's IR
- Breakeven Point — calculate breakeven with depreciation
- ROI calculator — evaluate the return on investment in equipment