What Constitutes Depreciation and Its Income Statement Location
Alphabet categorizes its depreciable assets primarily under the “Property and Equipment” designation on its balance sheet, which is fundamentally bifurcated into two main categories: technical infrastructure and office space. The technical infrastructure segment is the core driver of the company’s capital intensity and encompasses data center land, physical buildings, leasehold improvements, servers, and intricate network equipment. A secondary category involves assets not yet in service, representing data centers currently under construction and servers in the process of assembly.
When translating the wear and tear of these assets to the consolidated income statement, Alphabet does not present depreciation as an independent, standalone line item. Instead, the expense is allocated across the company’s functional expense categories based on the specific usage of the underlying asset. The vast majority of the depreciation expense related to the technical infrastructure is buried within the “Cost of Revenues” line item. Within this bucket, depreciation sits alongside traffic acquisition costs (TAC) paid to distribution partners and content acquisition costs for YouTube. A secondary, yet highly material, portion of depreciation is allocated to “Research and Development” (R&D) and “General and Administrative” expenses, capturing the amortization of servers and facilities strictly dedicated to Alphabet’s engineering, product development, and back-office administrative functions.
Factors Affecting Depreciation
Alphabet’s current and future depreciation trajectory is influenced heavily by dual forces: the unprecedented, exponential scale of its data center physical buildout and highly strategic alterations to the estimated useful lives of its hardware. In January 2023, Alphabet’s management completed a comprehensive internal assessment of its servers and network equipment, ultimately electing to extend the estimated useful life of its servers from four years to six years, and certain network equipment from five years to six years.
This specific change in accounting estimate fundamentally altered the company’s expense recognition curve. By stretching the depreciation schedule across a wider 72-month horizon, Alphabet recognized a massive reduction in short-term depreciation expense, which resulted in a $3.4 billion reduction in expenses for the full fiscal year 2023, effectively boosting net income and earnings per share. However, as the company aggressively scales its artificial intelligence infrastructure to support models like Gemini, the sheer absolute volume of new hardware is overwhelming the mathematical savings generated by this accounting adjustment. In early 2026, management stunned the market by announcing a staggering 2026 capital expenditure budget of $175 billion to $185 billion - effectively doubling its 2025 investment level - focused primarily on AI compute capacity, data center expansion, and proprietary silicon development. Furthermore, the company continues to navigate supply constraints around AI compute components and tightening United States export controls, which inject pricing volatility into their capital acquisition pipeline.
5-Year Historical Trends (2021 - 2025)
The historical financial trend showcases a rapid acceleration in capital intensity. While the depreciation curve was temporarily flattened by the 2023 accounting maneuver, the relentless pace of capital expenditures has forced the absolute depreciation figure to surge to all-time highs by 2025.
Fiscal Year (Ends Dec. 31) | Total D&A (Cash Flow Statement) | Capital Expenditures | Free Cash Flow |
2021 | $12.44 Billion | -$24.64 Billion | $67.01 Billion |
2022 | $15.93 Billion | -$31.49 Billion | $60.01 Billion |
2023 | $11.95 Billion | -$32.25 Billion | $69.50 Billion |
2024 | $15.31 Billion | -$52.54 Billion | $72.76 Billion |
2025 | $21.14 Billion | -$91.45 Billion | $73.27 Billion |
The 2023 dip in depreciation to $11.95 billion is the direct, mechanical result of the shift to a six-year useful life. By 2025, however, the absolute volume of new server deployments overpowered the extended timeline, driving D&A up by an astounding 38% year-over-year to $21.14 billion. Simultaneously, the capital expenditure line item nearly doubled from $52.54 billion to $91.45 billion, signaling the true commencement of the AI infrastructure cycle.
Predictions and Forecasts (2026 - 2028)
With Alphabet actively executing a forecasted $180 billion capital expenditure plan in 2026 , the depreciation pipeline is loaded with an unprecedented volume of future expenses. Assuming servers account for roughly 60% of this spend (approximately $108 billion) and are depreciated on a straight-line basis over six years, this single year of capital expenditure guarantees an incremental $18 billion in annual depreciation extending well into the 2030s. Forecasts model Alphabet’s consolidated depreciation and amortization surging to approximately $46.2 billion in 2026, and escalating sharply toward the $60 billion mark by 2028 as the massive 2026 deployments come online and begin amortizing. By 2029, independent market estimates compiled by Visible Alpha project Alphabet’s annual depreciation will approach $78 billion, representing roughly 11% of total expected revenues.
The Innovator’s Dilemma and the Cash Flow Lag
The underlying financial architecture of Alphabet is currently experiencing the most profound operational and structural stress test in its corporate history. The recent disclosure of a $175 billion to $185 billion capital expenditure budget for fiscal 2026 represents a paradigm shift that fundamentally alters the company’s return on invested capital (ROIC) profile. For over a decade, Alphabet was the quintessential asset-light cash machine, printing unparalleled free cash flow through its dominant search advertising monopoly. Today, it is transforming rapidly into a heavy-infrastructure utility required to power the generative AI economy. The critical issue for institutional capital is no longer simply top-line Google Services revenue growth, but rather the sustainability of free cash flow in the face of an exploding depreciation burden that remains cleverly obfuscated within the Cost of Revenues and R&D line items.
When Alphabet altered its depreciation schedules in 2021 and again in 2023 - stretching the estimated useful life of its network servers to six years - the maneuvers were communicated as prudent adjustments reflecting better hardware durability and software efficiencies. However, in the context of the current artificial intelligence boom, this six-year schedule borders on accounting fantasy. The technological half-life of a state-of-the-art AI accelerator, such as those produced by Nvidia, AMD, or Alphabet’s own proprietary Tensor Processing Units (TPUs), is realistically closer to 12 to 24 months before superior compute density and energy efficiency render prior generations economically obsolete. By choosing to amortize a $180 billion infrastructure expenditure over a full 72 months, Alphabet is artificially suppressing its near-term cost of revenues, thereby defending its gross margins from an immediate and severe collapse. If these complex AI assets require replacement before the end of their accounting life to maintain technological parity with Microsoft and Amazon, Alphabet faces the looming threat of massive, multi-billion dollar write-downs and accelerated depreciation charges later in the decade.
Furthermore, a structural cash flow mismatch is materializing that threatens to dilute the company’s legendary liquidity. Alphabet reported an impressive cloud backlog of $240 billion at the close of 2025, which acts as a seemingly bullish indicator of robust enterprise demand for its Gemini models and Google Cloud platform. However, the mechanics of this backlog are highly punitive to short-term liquidity. Alphabet must deploy tens of billions in cash upfront to procure the silicon, secure the real estate, construct the liquid cooling infrastructure, and fund the massive energy requirements for these data centers. Conversely, the revenue from the $240 billion backlog trickles in incrementally as monthly subscription and consumption fees over multi-year enterprise contracts. If the backlog scales to $400 billion, Alphabet’s free cash flow could temporarily invert, as the upfront capital requirements will vastly exceed the near-term cash collections from cloud tenants.
To maintain its historical return on assets (ROA), financial models dictate that a $180 billion capital expenditure outlay must generate in excess of $500 billion in incremental lifetime revenue over the span of those assets. Given that the broader digital advertising market is maturing and regulatory pressures regarding search monopolies are intensifying globally, the entirety of this required yield rests on Google Cloud and enterprise AI adoption. Alphabet is effectively wagering its pristine balance sheet on the premise that AI will be the most accretive technology in human history. If AI monetization scales slower than the depreciation curve of the underlying data centers, Alphabet’s profitability metrics will experience a structural, multi-year compression that the current equity valuation simply has not fully priced in.