5-Year Property Depreciation: MACRS, Bonus, and Section 179

Under the federal Modified Accelerated Cost Recovery System, 5-year property depreciation follows a fixed schedule that writes off the asset’s cost over six tax years using the 200% declining balance method: 20.00% in Year 1, 32.00% in Year 2, 19.20% in Year 3, 11.52% in Years 4 and 5, and 5.76% in Year 6. That schedule is the fallback. For most businesses placing 5-year property into service in 2026, the entire cost can be deducted immediately under 100% bonus depreciation, permanently restored by the One Big Beautiful Bill Act signed in mid-2025. The standard MACRS percentages still matter when you elect out of bonus depreciation, when passenger-vehicle caps apply, or when you sell the asset and face recapture.

What Counts as 5-Year Property

The IRS assigns assets to recovery classes based on the type of property, not how long you plan to use it. An asset lands in the 5-year class when its midpoint class life falls between four and ten years. The following are 5-year property under the federal tax code:

Automobiles and light trucks used in a business, regardless of purchase price, though separate depreciation caps apply to most passenger cars.
Qualified technological equipment, including computers, peripherals, and related high-tech equipment.
Semiconductor manufacturing equipment.
Computer-based telephone central office switching equipment.
Research and experimentation property: tangible personal property used in connection with research activities.
Certain farming machinery and equipment (other than grain bins, fences, and land improvements) when the original use begins with you after December 31, 2017.
Qualified clean energy property, including certain energy facilities, qualified investment property, and energy storage technology placed in service after 2024.

The clean energy category was added by the Inflation Reduction Act of 2022 and took effect for property placed in service after December 31, 2024.¹ Solar and wind energy property that begins construction after December 31, 2024, however, was removed from the 5-year class by subsequent legislation, so those assets no longer qualify.² The full statutory list appears in the Internal Revenue Code, and IRS Publication 946 walks through the classifications in plain English.³

The Standard MACRS Schedule

When you don’t use bonus depreciation or Section 179 expensing, 5-year property follows the standard MACRS schedule. The tax code requires the 200% declining balance method for any recovery period of ten years or less, which includes the 5-year class.³ Deductions are front-loaded in the early years, and the IRS tables automatically switch to straight-line partway through to recover the full cost.

The Half-Year Convention

The default rule treats every asset as if placed in service at the midpoint of the year, regardless of the actual purchase date.³ You get half a year of depreciation in Year 1 and the other half in a sixth year. So even though it’s called 5-year property, the deductions actually span six tax returns. The fixed MACRS percentages under this convention:

Year 1: 20.00%
Year 2: 32.00%
Year 3: 19.20%
Year 4: 11.52%
Year 5: 11.52%
Year 6: 5.76%

Multiply each percentage by the asset’s original cost (its depreciable basis). For a $50,000 piece of equipment, Year 1 gives you a $10,000 deduction, Year 2 jumps to $16,000, and the amounts taper from there. The six percentages sum to 100%. You report the annual deduction on IRS Form 4562.⁴

Tracking Adjusted Basis

Each year’s depreciation reduces the asset’s adjusted basis, which is your original cost minus total depreciation claimed. Adjusted basis matters when you sell, because it determines your taxable gain. Sell a $50,000 asset after three years of depreciation totaling $35,600 and your adjusted basis is $14,400. Sell for $20,000 and your taxable gain is $5,600.

When the Mid-Quarter Convention Applies Instead

The half-year convention assumes purchases are spread reasonably throughout the year. If the total depreciable basis of MACRS property you place in service during the last three months of your tax year exceeds 40% of all MACRS property placed in service that year, the mid-quarter convention kicks in instead.⁵

Under the mid-quarter convention, each asset is treated as placed in service at the midpoint of the quarter you bought it. For property purchased in the fourth quarter, that means only about a month and a half of depreciation in Year 1 instead of six months. The first-year MACRS percentage for 5-year property placed in service in Q4 drops from 20.00% to just 5.00%.⁶

This trips up businesses that buy one small asset in March and a large machine in December. The 40% test gets triggered, and first-year depreciation shrinks on everything placed in service that year. Real property such as buildings and structural improvements doesn’t count toward the calculation, but virtually all other depreciable assets do. In the fourth quarter, timing a purchase a few weeks earlier or later can make a real difference.

100% Bonus Depreciation in 2026

For most businesses, the standard MACRS percentages are a backup. The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025.⁷ You can deduct the entire cost of a qualifying 5-year asset in the year you place it in service, with no dollar cap. Under the earlier Tax Cuts and Jobs Act schedule, bonus depreciation had been phasing down and was set at 40% for 2025 and 20% for 2026 before disappearing; the OBBBA eliminated the phase-down and made 100% permanent with no scheduled sunset.⁸

Bonus depreciation has no taxable income limitation, so it can create or increase a net operating loss that carries forward to future years.⁹

Electing Out

You don’t have to take 100% bonus depreciation. If spreading deductions over multiple years makes more sense for your tax situation, you can elect 40% bonus depreciation instead of 100% for property placed in service during a tax year ending after January 19, 2025.⁸ You can also elect out entirely and let the asset follow the standard MACRS schedule. The election applies to all property in a given class placed in service during the year, so you cannot cherry-pick individual assets.

Section 179 Expensing

Section 179 is a separate immediate write-off with its own rules.¹⁰ The OBBBA raised the base deduction limit to $2,500,000 and the investment phase-out threshold to $4,000,000, effective for property placed in service after December 31, 2024. Both amounts are indexed for inflation beginning in 2026, rounded to the nearest $10,000. Once your total Section 179 purchases for the year exceed the phase-out threshold, the deduction limit shrinks dollar for dollar; buy more than $6,500,000 in qualifying property at the base figures and the Section 179 deduction disappears.

The deduction also cannot exceed your total taxable income from all active businesses for the year. Unlike bonus depreciation, Section 179 cannot create or increase a net operating loss. Any disallowed amount carries forward indefinitely and can be deducted in a future year, subject to that year’s dollar and income limits.¹¹ The election is made on Form 4562 in the year the property is placed in service.⁴

You can stack both provisions on the same asset. The typical approach is to apply Section 179 first, then take bonus depreciation on whatever cost remains, with any leftover basis following the standard MACRS schedule. The reason to use Section 179 when bonus depreciation also offers 100% write-offs with no dollar cap comes down to the net operating loss question. Section 179 gives you flexibility to adjust the election but caps the deduction at your business income. Bonus depreciation can generate an NOL that carries forward, but locks you into the class-wide election.

Passenger Vehicle Caps

Automobiles fall into the 5-year class, but passenger vehicles face annual depreciation ceilings that override the normal rules. Even with 100% bonus depreciation or Section 179, you cannot deduct more than the IRS-published cap. For passenger automobiles placed in service during 2026 where bonus depreciation applies:¹²

Year 1: $20,300
Year 2: $19,800
Year 3: $11,900
Each succeeding year: $7,160

Without bonus depreciation, the first-year cap drops to $12,300 while the later years remain the same.¹² For a car costing $60,000 or more, you will still be claiming depreciation well past the sixth year because the annual caps stretch the recovery period beyond the standard MACRS schedule. Heavy vehicles with a gross vehicle weight rating above 6,000 pounds are exempt from these passenger caps, which is why large SUVs and trucks are popular business purchases. Those heavier vehicles are still subject to a separate, higher Section 179 cap that is indexed annually for inflation.

Listed Property and the 50% Business Use Rule

Some 5-year assets are classified as listed property, a category that includes passenger vehicles and other assets the IRS considers prone to personal use. Listed property must be used more than 50% for qualified business purposes to qualify for MACRS accelerated depreciation, Section 179, or bonus depreciation.⁶

Fall below 50% business use and two things happen. You must switch to the Alternative Depreciation System, which uses straight-line depreciation over a longer recovery period. And any excess depreciation you claimed in earlier years when business use was above 50% must be recaptured as income in the year business use drops below the threshold.⁶ This catches people who claim aggressive first-year deductions on a vehicle and then shift the vehicle mainly to personal use. Contemporaneous records of business versus personal use are the only reliable way to defend the deduction if the IRS questions it.

Recapture When You Sell

Every dollar of depreciation reduces adjusted basis, which means a larger taxable gain at sale. Under Section 1245, gain on the sale of depreciable personal property is taxed as ordinary income to the extent of all depreciation previously taken, including Section 179 and bonus depreciation, not just standard MACRS deductions.¹³

Take a $100,000 asset expensed entirely in Year 1 using bonus depreciation. Adjusted basis is zero. Sell three years later for $30,000, and the whole $30,000 is ordinary income, taxed at your regular rate rather than the lower capital gains rate. The tax benefit isn’t erased, but it is deferred: you got the deduction at the front end and pay tax on the gain at the back end, with the time value of money working for you in between. Gains from selling depreciable business property held more than one year are reported in Part III of IRS Form 4797, which calculates the ordinary income recapture amount. Losses on such property are reported in Part I.¹⁴

State Tax Rules Often Diverge

Federal depreciation rules and state tax rules often diverge. Roughly a third of states fully conform to the federal 100% bonus depreciation provision, while many others decouple from bonus depreciation entirely or allow only a fraction of the federal amount. Some states also impose lower Section 179 limits than the federal threshold. If you operate in a state that decouples from bonus depreciation, you may owe state tax on income that was offset at the federal level, which creates a timing difference between your federal and state schedules. Check your state’s current conformity status before large capital purchases.

1
Internal Revenue Service. Cost Recovery for Qualified Clean Energy Facilities, Property and Technology
2
Internal Revenue Service. Publication 946 – How To Depreciate Property
3
Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
4
Internal Revenue Service. About Form 4562, Depreciation and Amortization (Including Information on Listed Property)
5
eCFR. 26 CFR 1.168(d)-1 – Half-Year and Mid-Quarter Conventions
6
Internal Revenue Service. Publication 946 – How To Depreciate Property
7
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
8
Internal Revenue Service. Notice 2026-11 – Interim Guidance on Additional First Year Depreciation Deduction
9
Internal Revenue Service. One, Big, Beautiful Bill Provisions
10
Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets
11
eCFR. 26 CFR 1.179-3 – Carryover of Disallowed Deduction
12
Internal Revenue Service. Rev. Proc. 2026-15
13
Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
14
Internal Revenue Service. Instructions for Form 4797