Are Capital Expenditures Tax Deductible? Depreciation and Section 179

Capital expenditures are generally not tax deductible in the year you pay for them. Federal tax law requires you to capitalize the cost of acquiring, producing, or improving tangible business property and recover that cost over several years through depreciation or amortization.¹ Two elections — Section 179 expensing and bonus depreciation — can turn that slow write-off into an immediate one for qualifying property, and a pair of safe harbors lets small-dollar purchases skip capitalization entirely.

Capital Expenditure or Current Expense

The line between a deductible business expense and a capital expenditure comes down to whether the spending keeps the business running day to day or adds lasting value. Office supplies and utility bills are current expenses. A delivery truck, a building renovation, or new manufacturing equipment is a capital expenditure.²

For work on an asset you already own, the IRS uses three criteria — sometimes called the BAR test — to decide whether the cost must be capitalized:

Betterment: the work increases the asset’s capacity, quality, or strength beyond its original condition.
Adaptation: the work converts the asset to a new or substantially different use.
Restoration: the work returns a non-functioning asset to working condition or rebuilds it after its useful life has ended.

Spending that meets none of the three usually counts as a repair, which is deductible in the year you pay it.

Routine Maintenance Safe Harbor

Even work that could look like a capital improvement can be deducted immediately under the routine maintenance safe harbor. The activity must be one you reasonably expect to perform because of normal use of the property. For buildings, the work must be expected to recur more than once during a 10-year window starting when the property is placed in service. For other property, it must recur more than once during the asset’s class life. The safe harbor does not apply if the work qualifies as a betterment.²

De Minimis Safe Harbor

Small-dollar purchases can also be deducted right away without being tracked as capital assets. The threshold depends on your books:

If your business has an applicable financial statement (such as a certified audited financial statement), you can deduct up to $5,000 per invoice or per item.
Without one, the limit is $2,500 per invoice or per item.

The election is made each year by attaching a statement to your timely filed return.²

The Default Rule: Depreciation and Amortization

When a purchase must be capitalized and no immediate-expensing election applies, you recover the cost over time. Tangible property is depreciated. Intangible property is amortized. Both spread the cost across the asset’s assigned life and give you a partial deduction each year.³

MACRS Recovery Periods

Most tangible business property is depreciated under the Modified Accelerated Cost Recovery System, which assigns a fixed recovery period to each asset type.⁴ Common periods include:

5 years for cars, light trucks, computers, and peripheral equipment.
7 years for office furniture and fixtures.
15 years for land improvements such as fences, parking lots, and bridges.
27.5 years for residential rental property.
39 years for commercial (nonresidential) real property.

MACRS front-loads deductions, so a larger share of the cost is written off in the early years. First-year deductions are shaped by conventions, including the default half-year convention and a mid-quarter convention that kicks in when more than 40% of the year’s depreciable property is placed in service during the last three months.⁵

Amortizing Intangibles

Section 197 intangibles — goodwill, customer lists, covenants not to compete, trademarks, and certain licenses — are amortized on a straight-line basis over 15 years starting in the month you acquire the asset.⁶ Computer software that is not acquired as part of a business purchase is instead depreciated over 36 months.⁷

Writing Off the Full Cost in Year One

Section 179 Expensing

Section 179 is an election to deduct the full purchase price of qualifying property in the year it is placed in service instead of depreciating it.⁸ Three limits apply:

A dollar cap of $2,500,000 for 2025, adjusted for inflation. The 2026 inflation-adjusted limit is expected to be approximately $2,560,000.⁹
A phase-out that reduces the deduction dollar for dollar once total qualifying property placed in service during the year exceeds $4,000,000 for 2025, or roughly $4,090,000 for 2026.
A taxable income ceiling: the deduction cannot exceed total taxable income from all active trades or businesses. Any excess carries forward.

Qualifying property must be acquired by purchase for use in the active conduct of a business, and business use must exceed 50%.⁹ Machinery, equipment, off-the-shelf computer software, and certain improvements to nonresidential real property (roofs, HVAC, fire protection) qualify. Land and land improvements such as parking lots and fences do not.⁵

Bonus Depreciation

Bonus depreciation under Section 168(k) is a second route to an immediate write-off. It has no dollar cap, and unlike Section 179, it can create a net operating loss. The One Big Beautiful Bill Act, signed into law on August 5, 2025, permanently restored the bonus depreciation rate to 100% for qualified property acquired and placed in service after January 19, 2025.¹⁰ Property acquired earlier in the phase-down took 80% in 2023, 60% in 2024, and 40% in 2025.⁵

Qualified property includes assets with a MACRS recovery period of 20 years or less, computer software, water utility property, and certain film, television, and theatrical productions. The asset can be new or used, so long as it is your first time placing it in business service.

The two provisions can be stacked. A common approach is to apply Section 179 first, up to the dollar cap and income limit, then use bonus depreciation on whatever cost remains. Because bonus depreciation is not capped by taxable income, it can generate a loss that offsets other income.

Property That Cannot Be Depreciated

Land is the important exception. Because it does not wear out, become obsolete, or get used up, land itself is never depreciable, and costs closely tied to the land — clearing, grading, landscaping — are generally treated as part of its nondepreciable cost.⁵ When you buy real estate, you must split the purchase price between the land and the building or structures on it. Also excluded: assets not used in a business or income-producing activity, assets without a determinable useful life, and property placed in service and disposed of in the same tax year.³

What Happens When You Sell

Depreciation deductions reduce your basis in the asset each year, and when you sell, part of the tax benefit is clawed back through depreciation recapture. The rules differ for equipment and buildings.

Equipment and Other Personal Property

Under Section 1245, gain on the sale of depreciable personal property is taxed as ordinary income up to the total depreciation you claimed. Any additional gain above that amount can qualify for capital gains rates.¹¹

Buildings and Other Real Property

Real property depreciated on a straight-line basis usually has no “additional” depreciation to recapture under Section 1250. Instead, the portion of gain attributable to prior straight-line depreciation is unrecaptured Section 1250 gain, taxed at a maximum rate of 25%. Any remaining gain is taxed at the applicable long-term capital gains rate.¹²

Claiming the Deduction on Your Return

Form 4562

Depreciation, amortization, and Section 179 deductions are reported on IRS Form 4562, attached to your primary return.¹³ Sole proprietors file it with Schedule C (Form 1040), C corporations with Form 1120, and S corporations with Form 1120-S. You need a new Form 4562 any year you place depreciable property in service, claim a Section 179 deduction, or claim depreciation on listed property.⁹

Listed Property

Passenger vehicles, home computers, business aircraft, and other assets commonly used for both business and personal purposes are listed property. If you claim depreciation or Section 179 on them, you must complete Part V of Form 4562 with the business-use percentage — business miles or hours divided by total. If business use drops to 50% or less during the recovery period, you lose accelerated depreciation and Section 179 for that asset, switch to straight-line, and may have to recapture excess depreciation as income.⁹

Records to Keep

For each capital asset, keep documentation of the purchase price, sales tax, shipping and installation costs, the date placed in service, and the assigned recovery period. Receipts and invoices establish both the business purpose and the total cost basis.

The general IRS rule is to keep records for at least three years after filing the return that includes the deduction.¹⁴ For depreciated assets, plan on longer. Because you claim depreciation each year of the recovery period and must calculate gain or recapture when you dispose of the asset, keep the records until at least three years after filing the return for the year you stop claiming depreciation or dispose of the property. A commercial building on a 39-year schedule can mean holding onto purchase records for more than 40 years.

Fixing Depreciation You Missed in Prior Years

If you failed to claim depreciation on a capital asset in earlier years, or used the wrong method or recovery period, you generally cannot fix the problem by filing amended returns. Instead, you file Form 3115 (Application for Change in Accounting Method) to move from the incorrect method to the correct one. This is an automatic change request, so advance IRS approval is not required.¹⁵

Form 3115 includes a Section 481(a) adjustment covering the cumulative difference between what you deducted and what you should have deducted. If you under-deducted, the negative adjustment produces a catch-up deduction taken in full in the year of the change. If you over-deducted, the positive adjustment is spread over four tax years. The original Form 3115 is attached to your timely filed return for the year of the change, with a signed copy sent to the IRS National Office.

1
Office of the Law Revision Counsel. 26 USC 263 Capital Expenditures
2
Internal Revenue Service. Tangible Property Final Regulations – Frequently Asked Questions
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Internal Revenue Service. Topic No. 704, Depreciation
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Office of the Law Revision Counsel. 26 USC 168 Accelerated Cost Recovery System
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Internal Revenue Service. Publication 946, How To Depreciate Property
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Office of the Law Revision Counsel. 26 US Code 197 – Amortization of Goodwill and Certain Other Intangibles
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Office of the Law Revision Counsel. 26 USC 167 Depreciation
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Office of the Law Revision Counsel. 26 USC 179 Election to Expense Certain Depreciable Business Assets
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Internal Revenue Service. Instructions for Form 4562 (2025)
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Office of the Law Revision Counsel. 26 US Code 168 – Accelerated Cost Recovery System
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Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets
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Internal Revenue Service. Topic No. 409, Capital Gains and Losses
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Internal Revenue Service. About Form 4562, Depreciation and Amortization
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Internal Revenue Service. How Long Should I Keep Records?
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Internal Revenue Service. Instructions for Form 3115