Cost Recovery Definition: MACRS, Section 179, and Bonus Depreciation

Cost recovery is the set of tax rules that lets a business deduct the price of a long-term asset across the years it produces income rather than all at once, and the main tools are depreciation for tangible property, amortization for intangibles, and depletion for natural resources. For the 2026 tax year, the Section 179 immediate expensing limit is $2,560,000, and 100% bonus depreciation is permanently restored for qualifying property acquired after January 19, 2025, under the One Big Beautiful Bill Act.¹

What Qualifies for Cost Recovery

An asset qualifies if you own it, you use it in a trade or business or to produce income, and its useful life extends beyond one year.² Items consumed within the year, like office supplies, get deducted immediately as ordinary business expenses instead.

Several categories are carved out. Land is the biggest one: it does not wear out or become obsolete, so you cannot depreciate it.³ When you buy a building, you have to split the purchase price between land and structure and depreciate only the structure. Inventory held for sale is also excluded because its cost flows through cost of goods sold when the item is sold. Personal-use property like your home or personal car does not qualify, and neither do investment assets like stocks and bonds. Property you place in service and dispose of in the same year generally falls outside the system too.

How MACRS Depreciation Works

The Modified Accelerated Cost Recovery System is the default method for tangible property placed in service after 1986.² You don’t choose the recovery period. The IRS has already assigned each asset to a class with a fixed life.

3-year property: certain manufacturing tools and racehorses
5-year property: computers, vehicles, office machinery, and research equipment
7-year property: office furniture, appliances, and most general-purpose equipment
15-year property: land improvements like fences, roads, and parking lots
27.5 years: residential rental buildings
39 years: nonresidential commercial buildings

These classes come from the statute and the IRS tables.⁴ Most classes use a 200% declining balance method, which front-loads the deductions, then switches automatically to straight-line at the point where straight-line produces a larger annual deduction. Fifteen-year and 20-year property use a slower 150% declining balance rate. You can elect straight-line for any class if you prefer even deductions across the life of the asset.

Section 179 Immediate Expensing

Section 179 lets you skip the multi-year schedule and deduct the full cost of qualifying assets in the year you place them in service. For 2026, the inflation-adjusted deduction limit is $2,560,000, and the benefit phases out dollar-for-dollar once total qualifying property placed in service during the year exceeds $4,090,000.⁵

The catch: your Section 179 deduction cannot exceed your taxable income from the active conduct of your trade or business for the year.⁵ Section 179 cannot create or increase a net operating loss. Any unused deduction carries forward to future years.

Qualifying property includes most tangible personal property used in a business, off-the-shelf computer software, and certain qualified real property improvements like roofs, HVAC systems, fire suppression, and security systems. Real property used for lodging, such as a hotel, generally does not qualify. You claim Section 179 on IRS Form 4562.⁶

Bonus Depreciation After the OBBBA

Bonus depreciation is a separate first-year deduction that stacks on top of regular MACRS. The One Big Beautiful Bill Act permanently restored the 100% additional first-year depreciation deduction for qualified property acquired after January 19, 2025.¹ A business placing qualifying assets in service during 2026 can deduct the entire cost in year one.

The deduction applies to both new and used property as long as the property is new to you and meets the acquisition requirements. Property acquired under a binding written contract entered before January 20, 2025, is treated as acquired on the contract date, which could disqualify it from the 100% rate.⁷

Unlike Section 179, bonus depreciation has no dollar cap and no taxable income limitation. It can create or deepen a net operating loss. You can elect out of bonus depreciation for any class of property if you would rather spread the deductions. The OBBBA also offers an election to claim 40% instead of 100% for property placed in service during the first tax year ending after January 19, 2025.⁷

Passenger Vehicle Caps

Luxury passenger vehicles face annual depreciation ceilings even when bonus depreciation applies. For vehicles placed in service during 2026, the IRS limits are:⁸

First year with bonus depreciation: $20,300
First year without bonus depreciation: $12,300
Second year: $19,800
Third year: $11,900
Each year after that: $7,160

To claim the higher first-year limit, you must use the vehicle more than 50% for business purposes during 2026.⁸ If business use drops to 50% or below in a later year, you may have to recapture the excess depreciation you already claimed. A $60,000 passenger vehicle will not produce the same first-year write-off a $60,000 piece of manufacturing equipment would.

Amortization of Intangibles

Intangible assets like patents, trademarks, customer lists, and acquired goodwill go through amortization instead of depreciation. When you acquire these as part of a business purchase, Section 197 requires straight-line amortization over 15 years, starting in the month of acquisition.⁹

The 15-year period covers a broad list: goodwill, going-concern value, workforce in place, business books and records, customer-based intangibles, supplier relationships, licenses and permits from a government unit, non-compete agreements tied to a business acquisition, and franchises or trade names.⁹ You cannot accelerate Section 197 amortization. If you dispose of a Section 197 intangible before 15 years are up, any remaining basis generally gets folded into the basis of other Section 197 intangibles acquired in the same transaction rather than recognized as a loss. Self-created intangibles like a patent you developed in-house often fall outside Section 197 and follow different rules.

Depletion for Natural Resources

Depletion is cost recovery for assets that are physically consumed rather than worn out, such as oil, minerals, and timber.¹⁰ Two methods exist. Cost depletion divides your basis in the resource by total estimated recoverable units and multiplies by units extracted during the year; once your basis is recovered, the deductions stop. Percentage depletion allows a fixed percentage of gross income from the property, with the percentage varying by resource type.¹¹ Percentage depletion is unusual because cumulative deductions can exceed your original cost basis. Taxpayers generally use whichever method yields the larger deduction for the year.

The De Minimis Safe Harbor for Small Purchases

Not every purchase needs to go through the depreciation machinery. The IRS tangible property regulations provide a de minimis safe harbor that lets you immediately expense low-cost items. A business with an applicable financial statement can expense items costing up to $5,000 per invoice. A business without one can expense items up to $2,500 per invoice.¹²

You elect the safe harbor annually on your tax return. The threshold applies per invoice or per item, not as an annual aggregate, so you can expense hundreds of qualifying purchases in a single year as long as each falls under the limit. A $2,000 laptop or $1,500 piece of shop equipment can be written off in full instead of being depreciated across five or seven years.

For costs that exceed the safe harbor, the IRS uses a separate framework to sort deductible repairs from capital improvements. Costs that restore property to working condition after a breakdown or fix routine wear and tear generally qualify as deductible repairs. Costs that make the property better than it was, adapt it to a new use, or restore it after a major event are treated as capital improvements and get added to basis.

Depreciation Recapture When You Sell

Every dollar of depreciation you claim reduces the asset’s adjusted basis. When you later sell the asset for more than that reduced basis, some or all of the gain is recaptured and taxed as ordinary income instead of at the lower capital gains rate.

For personal property like equipment, vehicles, and machinery, Section 1245 applies. Gain attributable to prior depreciation deductions is taxed entirely as ordinary income. Section 179 deductions and bonus depreciation are treated the same way for recapture purposes, so aggressive first-year expensing creates a larger recapture exposure if you later sell the asset for a significant price.¹³

Real property like commercial buildings follows different rules under Section 1250. Because buildings are typically depreciated straight-line under MACRS, recaptured gain is taxed at a maximum 25% rate rather than full ordinary income rates. Any gain above the recapture amount qualifies for long-term capital gains treatment. Recapture gets reported on IRS Form 4797, which feeds into your regular return.¹⁴ The sale price of a depreciated asset is rarely all capital gain, and planning without accounting for recapture leads to a larger tax bill than expected.

1
Internal Revenue Service. One, Big, Beautiful Bill Provisions
2
Internal Revenue Service. Topic No. 704, Depreciation
3
Internal Revenue Service. Publication 946 – How To Depreciate Property
4
Office of the Law Revision Counsel. 26 US Code 168 – Accelerated Cost Recovery System
5
Office of the Law Revision Counsel. 26 USC 179 – Election To Expense Certain Depreciable Business Assets
6
Internal Revenue Service. Instructions for Form 4562 (2025)
7
Internal Revenue Service. Treasury and IRS Issue Guidance on Additional First Year Depreciation Deduction
8
Internal Revenue Service. Revenue Procedure 2026-15
9
Office of the Law Revision Counsel. 26 US Code 197 – Amortization of Goodwill and Certain Other Intangibles
10
Office of the Law Revision Counsel. 26 USC 611 – Allowance of Deduction for Depletion
11
Office of the Law Revision Counsel. 26 US Code 613 – Percentage Depletion
12
Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions
13
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
14
Internal Revenue Service. Instructions for Form 4797 (2025)