Depreciation Basics

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 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.

Tip: When you sell depreciable real estate, all previously claimed depreciation is subject to depreciation recapture tax at up to 25% — plan for this when modeling the sale of rental properties.

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 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.

• 2025 limit: $1,220,000 per year (indexed to inflation).
• Phase-out: Begins when total asset purchases exceed $3,050,000; 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.

Warning: If you stop using a Section 179 asset for business purposes within its depreciable life, you may have to recapture some of the deduction as ordinary income.

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	40%
2026	20%
2027+	0% (unless Congress acts)

Key rules for 2025: 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 choose to opt out of bonus depreciation in 2025 and take larger deductions later.

Tip: Stack Section 179 and bonus depreciation strategically. Use Section 179 first (up to taxable income), then use bonus depreciation on the remainder to generate a loss if beneficial.