Capital Goods: Depreciation, Section 179, and Sale Rules

Capital goods are the long-lived physical assets a business uses to produce other goods or deliver services: factory machinery, commercial vehicles, office furniture, computers, and the buildings that house operations. The IRS requires any asset with a useful life longer than one year and used in a trade or business to be capitalized rather than deducted all at once, meaning the cost is spread across multiple tax years through depreciation.¹ For 2026, two provisions let businesses recover those costs much faster than standard depreciation allows: a Section 179 expensing limit of $2,560,000 and permanently restored 100% bonus depreciation under the One Big Beautiful Bill Act.

What Counts as a Capital Good

To be treated as depreciable property under federal tax rules, an asset has to meet four tests: you own it, you use it in your business or to produce income, it has a determinable useful life, and it lasts more than one year.¹ “Determinable useful life” means the asset wears out, becomes obsolete, or loses value over time. Land does not qualify because it does not deteriorate.

The range is broad. A CNC milling machine, a fleet of delivery trucks, an industrial printing press, a walk-in freezer bolted to a restaurant floor, and the warehouse that holds inventory all count. Off-the-shelf business software counts too. The common thread is that each asset contributes to revenue over several years rather than getting consumed in a single production cycle.

Cost matters as well. A $5 box of pens may technically last more than a year, but nobody capitalizes it. The IRS offers a de minimis safe harbor that lets businesses expense items costing $2,500 or less per invoice without capitalizing them, or $5,000 per invoice for businesses with audited financial statements.² Anything above those thresholds that meets the four-part test gets capitalized.

How Capital Goods Differ From Consumer and Intermediate Goods

The same physical item can be a capital good or a consumer good depending on who buys it and why. A sedan a family buys for weekend errands is a consumer good. The identical sedan a ride-share company buys to generate fares is a capital good. Classification follows purpose, not product.

Intermediate goods are a separate category. These are materials consumed or transformed during production: steel, lumber, electronic components, fabric. A machine that cuts steel stays intact after the job and is a capital good. The steel itself disappears into the finished product and is an intermediate good, recorded as inventory and expensed as cost of goods sold when the product ships.

The practical test: if an asset’s economic benefit is exhausted inside a single production cycle, it is an intermediate good. If the benefit stretches across multiple periods, it is a capital good. Getting this wrong matters, because the accounting and tax treatment are fundamentally different.

Recovering the Cost Through Depreciation

When you capitalize an asset, you don’t deduct the full price in year one. You spread it across the asset’s useful life. The logic is simple: a machine that earns revenue for seven years should have its cost matched against revenue over those same seven years.

Calculating depreciation takes three inputs: cost basis (purchase price plus shipping, installation, and setup), estimated useful life, and salvage value (what you expect the asset to be worth at the end).

Straight-Line Depreciation

The simplest method allocates an equal amount each year. A $100,000 machine with a 10-year life and $10,000 salvage value produces $9,000 of depreciation annually. This works well for financial statements because it is smooth and predictable, but it is not usually how tax depreciation works.

MACRS and the Property Classes

For federal returns, most businesses use the Modified Accelerated Cost Recovery System. MACRS ignores salvage value and assigns each asset to a predetermined property class that fixes the recovery period.¹ The default calculation uses a 200% declining balance method that front-loads deductions into the early years, giving you larger write-offs when the asset is newest.

The classes cover virtually every type of business asset:

3-year property: over-the-road tractor units and certain racehorses.
5-year property: cars, trucks, buses, office machinery such as copiers and calculators, computers, and research equipment.
7-year property: office furniture, desks, safes, railroad track, and any property without a designated class life.
10-year property: vessels, barges, and single-purpose agricultural structures.
15-year property: land improvements such as fences, roads, sidewalks, and retail fuel outlets.
27.5-year and 39-year property: residential rental buildings and nonresidential commercial buildings, respectively.

Depreciation is reported on Form 4562, Depreciation and Amortization, filed with your annual return.³ An asset that doesn’t fit a named class defaults to the 7-year category.

Faster Write-Offs for 2026: Section 179 and Bonus Depreciation

Standard MACRS stretches cost recovery over years. Two provisions let businesses write off capital goods much faster, and for many small and mid-sized companies these accelerated deductions are the whole reason capital investment pencils out in a given year.

Section 179 Expensing

Section 179 lets you deduct the full purchase price of qualifying equipment in the year you place it in service, up to a dollar cap. For 2026, that cap is $2,560,000. The deduction phases out dollar-for-dollar once total equipment purchases for the year exceed $4,090,000 and disappears entirely at $6,650,000.⁴ Both thresholds are inflation-adjusted annually.

Qualifying property includes tangible personal property such as machinery, equipment, and furniture; off-the-shelf computer software; and certain improvements to nonresidential buildings including roofs, HVAC systems, fire alarms, and security systems.¹ Vehicles over 6,000 pounds gross vehicle weight rating qualify, though SUVs in the 6,000-to-14,000-pound range are subject to a separate cap of $32,000 for 2026.

One important limit: the Section 179 deduction cannot exceed your business’s taxable income for the year. If your business earns $200,000 and you buy $300,000 of equipment, you can deduct only $200,000 under Section 179. The remaining $100,000 carries forward.

100% Bonus Depreciation

The One Big Beautiful Bill Act permanently restored 100% first-year bonus depreciation for qualified property acquired after January 19, 2025.⁵ The entire cost of eligible new or used property can be deducted in year one, with no dollar cap. Unlike Section 179, bonus depreciation can create or increase a net operating loss.

The practical difference comes down to flexibility. Section 179 is elective and capped and limited to taxable income. Bonus depreciation is automatic (you have to opt out), uncapped, and can generate a loss. Most businesses apply Section 179 first up to its limits, then use bonus depreciation on anything left.

When Spending Is a Repair Instead of a New Capital Good

Not every dollar put into existing equipment is a new capital expenditure. Routine repairs and maintenance are deductible in the year paid. The IRS draws the line with the BAR test: an expenditure must be capitalized only if it results in a Betterment, Adaptation, or Restoration of the asset.²

Betterment: the work materially increases capacity, productivity, efficiency, or output, or fixes a defect that existed before you acquired the asset.
Adaptation: the work converts the asset to a new or different use that wasn’t your original purpose when you placed it in service.
Restoration: the work replaces a major component, returns a non-functional asset to working condition, or rebuilds it to like-new condition after the end of its class life.

If the work doesn’t trigger any of the three, it is a deductible repair. Replacing a worn belt on a conveyor is a repair. Replacing the entire motor assembly that drives the conveyor is likely a restoration. This is where audits most often happen, because the incentive to call something a repair rather than a capital improvement is obvious.

A separate safe harbor covers routine maintenance: recurring activities you reasonably expect to perform more than once during the asset’s class life to keep it operating normally. Oil changes on a fleet vehicle, annual HVAC filter replacement, and scheduled recalibration of manufacturing sensors all qualify. Routine maintenance that is also a betterment still gets capitalized.²

What Happens When You Sell a Capital Good

Depreciation gives you deductions on the way in. The IRS claws some of that back when you sell the asset for more than its depreciated book value. This is depreciation recapture, and failing to anticipate it is one of the most common tax surprises for business owners.

Section 1245 Recapture

Most tangible business equipment is Section 1245 property. When you sell it at a gain, the portion of your gain attributable to depreciation you previously claimed is taxed as ordinary income rather than at capital gains rates.⁶ The recapture amount is the lesser of your total gain or the total depreciation (including any Section 179 deductions) you claimed on the asset.

In practice: you buy a $100,000 machine, depreciate it to $20,000 over several years ($80,000 of total deductions), then sell it for $65,000. Your gain is $45,000, which is sale price minus adjusted basis. All $45,000 is taxed as ordinary income because it falls entirely within the $80,000 you previously claimed. You took ordinary deductions on the way in, so the IRS treats the recaptured amount as ordinary income on the way out.

Section 1231 Treatment

If you sell for more than the original cost, the gain above the recapture amount qualifies as a Section 1231 gain. Net Section 1231 gains for the year are treated as long-term capital gains, taxed at more favorable rates.⁷ Net Section 1231 losses are treated as ordinary losses, offsetting ordinary income. The asymmetry favors taxpayers: gains get capital treatment, losses get ordinary treatment.

One catch is the five-year lookback. If you claimed net Section 1231 losses in any of the previous five years that haven’t yet been offset by Section 1231 gains, your current gains are recharacterized as ordinary income up to the amount of those unrecaptured losses.⁷

Sales of depreciable business property held longer than one year are reported on Form 4797, not Schedule D. If you sell a building together with the land underneath it, you allocate the sale price between the two based on fair market value and report each piece separately.⁸

1
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
2
Internal Revenue Service. Tangible Property Final Regulations – Frequently Asked Questions
3
Internal Revenue Service. 2025 Instructions for Form 4562 – Depreciation and Amortization
4
Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
5
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
6
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
7
Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets
8
Internal Revenue Service. Instructions for Form 4797