Depreciation Fundamentals: MACRS, Section 179, and Recapture

Depreciation works by letting you deduct the cost of a business asset a piece at a time across the years it stays in service, instead of writing off the whole cost the year you buy it. The IRS assigns each type of property a recovery period, a method that decides how much comes off each year, and a set of rules that let you accelerate part or all of the deduction into year one. The deduction reduces your taxable income directly, so getting the mechanics right matters as much for a landlord with one rental as for a business buying a fleet of trucks.

Property That Qualifies

Federal law allows depreciation on property that meets three tests: you own it (or are treated as the owner under a capital lease), you use it in a trade, business, or income-producing activity, and it has a useful life longer than one year.¹ Items you use up within a year, like office supplies, are just ordinary expenses.

Typical qualifying property: machinery, business vehicles, computers, office furniture, and buildings held for rental income or commercial use. Two boundaries catch people. Land is never depreciable, so when you buy real property you have to split the price between the building (depreciable) and the land (not), commonly using the ratio from your county’s property tax assessment. And inventory does not qualify. A car dealer cannot depreciate the cars on the lot, but can depreciate the showroom, the service lifts, and the back-office computers.

Figuring the Cost Basis

Your depreciable amount is the asset’s cost basis, which is more than the sticker price. Basis includes everything you paid to acquire the asset and get it ready to use: purchase price, sales tax, shipping, installation, and testing.² Pay $40,000 for a machine plus $2,000 in freight and $1,500 for installation, and your depreciable basis is $43,500. Salvage value under MACRS is treated as zero, so you depreciate the full basis.

How MACRS Assigns Recovery Periods

The Modified Accelerated Cost Recovery System is the standard federal method. Rather than asking each business to estimate an asset’s useful life, MACRS drops every type of property into a class with a fixed recovery period.³ The classes you see most often:

5-year property: computers, office equipment, automobiles, light trucks, and research equipment
7-year property: office furniture, fixtures, and most machinery not assigned elsewhere
15-year property: land improvements such as fences, roads, and parking lots
27.5-year property: residential rental buildings
39-year property: commercial (nonresidential) buildings

For most personal property classes, MACRS uses a 200% declining balance method that switches to straight-line in the year that produces a bigger deduction. That front-loads the write-off: larger deductions early, smaller ones late. Buildings use straight-line across the whole recovery period.⁴

Placed-in-Service Conventions

MACRS does not care that you bought the asset on a specific day. It uses conventions that set when the asset is treated as placed in service:

Half-year convention. Most personal property is treated as placed in service at the midpoint of the year, no matter when you bought it. Half a year of depreciation in year one, half in the final year.⁴
Mid-quarter convention. If more than 40% of your total depreciable personal property for the year gets placed in service in the last three months, the half-year rule is replaced. Each asset is then treated as placed in service at the midpoint of the quarter it was actually acquired.⁵
Mid-month convention. Residential rental and commercial buildings are always treated as placed in service at the midpoint of the month they’re acquired.

The mid-quarter rule is aimed at businesses that make a big December purchase to grab a full half-year of depreciation. Cross the 40% threshold and every asset you placed in service that year shifts to less favorable mid-quarter treatment.

When You Must Use ADS Instead

MACRS has two tracks. Most businesses use the General Depreciation System (GDS). The Alternative Depreciation System (ADS) uses longer recovery periods and straight-line depreciation, and it is mandatory in specific situations:

Tax-exempt use property or property financed with tax-exempt bonds
Property used predominantly outside the United States
Listed property used 50% or less for business
Real property held by an electing real property trade or business under the business interest limitation rules
Farming property where the taxpayer elected out of uniform capitalization rules

ADS recovery periods run longer. Residential rental property, for instance, moves from 27.5 years under GDS to 30 years under ADS. Property depreciated under ADS also cannot claim bonus depreciation.⁴

Writing Off More in Year One

Two provisions let you compress depreciation into the first year, and both can apply to the same tax return.

Section 179

Section 179 lets you expense the full cost of qualifying property the year you place it in service. For 2026, the maximum deduction is $2,560,000. The limit phases out dollar-for-dollar once total qualifying property placed in service during the year exceeds $4,090,000, which effectively reserves the benefit for small and mid-sized businesses.⁶

Most tangible personal property used in business qualifies: equipment, machinery, off-the-shelf software, and certain building improvements like roofs, HVAC systems, and security systems. Passenger vehicles classified as SUVs have a separate 2026 cap of $32,000.⁶ One catch: a Section 179 deduction cannot create or increase a net operating loss. It is limited to your taxable income from all active trades or businesses for the year, with anything you cannot use carrying forward.

Bonus Depreciation

Bonus depreciation under Section 168(k) is an additional first-year deduction stacked on top of regular MACRS. The One Big Beautiful Bill Act (P.L. 119-21), enacted in 2025, permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025.³ For property placed in service during 2026, the entire cost can come off in year one.

Unlike Section 179, bonus depreciation has no dollar cap and can create a net operating loss. It applies automatically unless you elect out. Qualifying property covers new and used tangible property with a MACRS recovery period of 20 years or less, computer software, and certain qualified film and television productions. Buildings with 27.5- or 39-year recovery periods do not qualify, though qualified improvement property (interior improvements to nonresidential buildings) does.

Between the two, you get some flexibility. Many taxpayers apply Section 179 first to specific assets and let bonus depreciation cover the rest. Electing out of bonus depreciation on a class of property can make sense if you expect to be in a higher tax bracket in later years.

Small Purchases: The De Minimis Safe Harbor

Not everything has to run through the depreciation machinery. The de minimis safe harbor election lets you expense low-cost items immediately. With audited financial statements (an applicable financial statement), the threshold is $5,000 per item or invoice. Without one, it is $2,500 per item or invoice.⁷ Make the election by attaching a statement titled “Section 1.263(a)-1(f) de minimis safe harbor election” to your timely filed return. It applies for one year at a time, so you need to make it annually. Inventory and land costs are excluded.

Vehicles and Other Listed Property

Assets that lend themselves to personal use get extra scrutiny. The IRS classifies passenger automobiles and other mixed-use property as “listed property.” To claim Section 179 or bonus depreciation on listed property, you must use it more than 50% for qualified business purposes in the year you place it in service.⁴

If business use drops to 50% or below in a later year, you must switch to straight-line ADS for the remaining life of the asset, and you may have to recapture excess depreciation from earlier years as ordinary income. A contemporaneous log of business versus personal use is the best defense in an audit.

What Happens When You Sell: Recapture

Depreciation deductions reduce your basis in the asset year by year. When you sell, the IRS wants some of that benefit back through depreciation recapture, and it surprises many sellers.

For tangible personal property like equipment and vehicles (Section 1245 property), any gain up to the total depreciation you claimed is taxed as ordinary income at your regular rate, not the lower capital gains rate.⁸ Only gain above that gets capital gains treatment.

Real property follows different rules. Depreciation recapture on buildings is taxed at a maximum rate of 25% on what the IRS calls “unrecaptured Section 1250 gain,” the portion of your gain attributable to depreciation you took.⁹ Remaining gain gets long-term capital gains treatment.

Report sales of depreciable business property on Form 4797, which has a dedicated section (Part III) for computing recapture.¹⁰ When a sale covers both depreciable and non-depreciable property (a building and the land under it), you allocate the sale price between them by fair market value and report each separately.

Reporting and Records

Claim depreciation on Form 4562, Depreciation and Amortization. File it any year you place new depreciable property in service or claim a Section 179 deduction.¹¹ The totals flow to the relevant schedule, such as Schedule C for sole proprietors or Schedule E for rental property owners.

Record-keeping is heavier than for most tax items. Keep the original purchase invoice, documentation of all costs folded into basis, and the date placed in service. The IRS wants these records for as long as you own the asset plus the statute of limitations period after disposition.¹² In practice: at least three years after the tax year you sell or retire the asset, seven if you claim a loss from worthless securities or bad debt tied to it. If you cannot substantiate a depreciation deduction, the IRS can disallow it and assess an accuracy-related penalty of 20% of the resulting underpayment.¹³

Fixing Depreciation You Forgot to Claim

If you missed depreciation in prior years, do not file amended returns. The IRS treats a change in depreciation as an accounting method change, which requires Form 3115, Application for Change in Accounting Method. It falls under automatic consent procedures, so you do not need advance IRS approval and there is no user fee.¹⁴

The form computes a “Section 481(a) adjustment” covering the cumulative depreciation you should have taken. If the adjustment is negative (you under-depreciated), you claim the entire catch-up in the year of change instead of amending earlier returns. Attach the original Form 3115 to your timely filed return for the year of change, and send a signed copy to the IRS National Office by the same deadline. Full credit for missed deductions, no penalties, as long as you follow the procedure.

State Depreciation Does Not Always Match Federal

Federal depreciation does not automatically carry to your state return. Most states follow federal MACRS, but conformity with Section 179 limits and bonus depreciation varies. Many states cap Section 179 below the federal $2,560,000 limit, and a majority have decoupled from federal bonus depreciation at some point, requiring an add-back and a separate state depreciation schedule. Check your state’s current conformity rules before assuming the federal numbers carry through.

1
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
2
Internal Revenue Service. Publication 551 – Basis of Assets
3
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
4
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
5
eCFR. 26 CFR 1.168(d)-1 – Applicable Conventions, Half-Year and Mid-Quarter Conventions
6
Internal Revenue Service. Revenue Procedure 25-32
7
Internal Revenue Service. Tangible Property Final Regulations
8
Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets
9
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
10
Internal Revenue Service. Instructions for Form 4797
11
Internal Revenue Service. About Form 4562, Depreciation and Amortization
12
Internal Revenue Service. How Long Should I Keep Records
13
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
14
Internal Revenue Service. Instructions for Form 3115