Depreciation Basics
Straight-line vs accelerated depreciation, Section 179, and bonus depreciation for business owners.
TL;DR
- 01Depreciation spreads asset costs over their useful life, not all at once.
- 02Section 179 expenses up to $2,560,000 of qualifying assets immediately in 2026.
- 03Bonus depreciation stays at 100% in 2026, made permanent by the One Big Beautiful Bill Act.
Tips
- 01When you sell depreciable real estate, prior depreciation is subject to recapture tax at up to 25%, so plan for it.
- 02Stack Section 179 with bonus depreciation: use Section 179 first up to taxable income, then apply bonus depreciation on the rest.
Warnings
- 01If you stop using a Section 179 asset for business purposes early, you may have to recapture part of the deduction as income.
- 02Land is never depreciable because it does not wear out, and personal-use property only qualifies for its business-use percentage.
- 03Bonus depreciation does not apply to buildings, even though it covers most qualifying property with a 20-year recovery period or less.
What Depreciation Is
Depreciation is the process of deducting the cost of a business asset over its useful life rather than in the year of purchase. The IRS requires this for most assets because their value is consumed gradually over time.
- Depreciable assets include equipment, machinery, vehicles, computers, and buildings used in a business or investment activity.
- Land is not depreciable because it does not wear out.
- Personal-use property cannot be depreciated — only the business-use percentage qualifies.
| Asset Type | IRS Recovery Period | Common Method |
|---|---|---|
| Computers, equipment | 5 years | MACRS (200% DB) |
| Office furniture | 7 years | MACRS (200% DB) |
| Residential rental property | 27.5 years | Straight-line |
| Commercial real estate | 39 years | Straight-line |
| Land improvements | 15 years | MACRS (150% DB) |
Straight-Line Depreciation
Straight-line depreciation spreads the cost of an asset evenly over its useful life. It is the simplest method and is required for real property.
Formula: Annual Depreciation = (Cost − Salvage Value) ÷ Useful Life
Example: A commercial oven costing $30,000 with a 5-year life and $0 salvage value depreciates at $6,000 per year.
- Produces predictable, equal deductions each year.
- Required for residential rental property (27.5 years) and commercial real estate (39 years).
- A partial-year convention applies in the first and last year of service.
Accelerated and MACRS Depreciation
The Modified Accelerated Cost Recovery System (MACRS) is the standard depreciation method for most business assets under U.S. tax law. It front-loads deductions — you claim more in early years and less later.
MACRS uses a 200% declining balance method for most personal property and 150% declining balance for land improvements, switching to straight-line when that produces a larger deduction.
| Year | 5-Year MACRS Rate | Deduction on $10,000 Asset |
|---|---|---|
| 1 | 20.00% | $2,000 |
| 2 | 32.00% | $3,200 |
| 3 | 19.20% | $1,920 |
| 4 | 11.52% | $1,152 |
| 5 | 11.52% | $1,152 |
| 6 | 5.76% | $576 |
The half-year convention applies in year 1 and the final year unless more than 40% of assets are placed in service in Q4, triggering the mid-quarter convention.
Section 179 Deduction
Section 179 allows a business to expense the full cost of qualifying property in the year it is placed in service, rather than depreciating it over time.
- 2026 limit: $2,560,000 per year, raised by the One Big Beautiful Bill Act (indexed to inflation going forward).
- Phase-out: Begins when total asset purchases exceed $4,090,000; the deduction is reduced dollar-for-dollar above that threshold.
- Section 179 cannot create a net loss — the deduction is limited to your business taxable income. Unused amounts carry forward.
- Qualifying property includes most tangible personal property, off-the-shelf software, and certain qualified improvement property.
Bonus Depreciation Rules
Bonus depreciation allows an additional first-year deduction on top of regular MACRS depreciation. Unlike Section 179, it can create a tax loss that carries back or forward.
| Tax Year | Bonus Depreciation % |
|---|---|
| 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 (before Jan. 20) | 40% |
| 2025 (after Jan. 19) and 2026 | 100% |
The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying property placed in service after January 19, 2025, reversing the phase-down schedule from prior law. Bonus depreciation applies to new and used qualifying property with a recovery period of 20 years or less. It does not apply to buildings. Businesses that expect higher taxable income in future years may still choose to elect out of bonus depreciation and take standard MACRS deductions instead.
FAQ
Depreciation is the process of deducting the cost of a business asset over its useful life rather than in the year of purchase. The IRS requires this for most assets because their value is consumed gradually over time.
Section 179 allows up to $2,560,000 of qualifying assets to be expensed immediately in 2026, after the One Big Beautiful Bill Act raised the limit. This beats spreading the deduction across multiple years through standard depreciation.
Straight-line depreciation spreads an asset's cost evenly over its useful life, producing equal deductions each year. MACRS front-loads deductions using a declining balance method, so you claim more in early years and less later. Real property like residential rental and commercial buildings must use straight-line.
Selling depreciable real estate triggers depreciation recapture, which taxes previously claimed depreciation as ordinary income at rates up to 25 percent. This applies on top of any capital gains tax owed on the sale. Plan for this tax when modeling the sale of rental or business property.
You can expense up to $2,560,000 of qualifying property in 2026, with the deduction phasing out once total purchases exceed $4,090,000. Section 179 cannot create a net loss, since the deduction is capped at your business taxable income. Unused amounts carry forward to future years.