Depreciation Methods for Tax Purposes: MACRS, Section 179, and Bonus

For federal tax purposes, nearly all tangible business property is depreciated under the Modified Accelerated Cost Recovery System (MACRS), layered with two first-year acceleration tools: Section 179 expensing and bonus depreciation. The depreciation methods for tax purposes you’ll actually choose among come down to how these three pieces stack together. For most equipment, software, and vehicles placed in service in 2026, the combination of Section 179 and 100% bonus depreciation lets you deduct the full cost in year one. Regular MACRS, with its declining-balance and straight-line calculations spread across a fixed recovery period, handles whatever doesn’t qualify for the accelerated provisions, or whatever you choose to depreciate the slow way.

The sequence matters: Section 179 applies first, bonus depreciation applies to whatever basis remains, and regular MACRS handles any residual. Each tool has its own eligibility rules, limits, and strategic uses. The sections below walk through each one and the choices they create.

What Property Can You Depreciate

Depreciable property has to pass all four of these tests: you own it, you use it in a business or income-producing activity, it has a determinable useful life, and it will last longer than one year.¹ Fail any one and the asset is out. Land never qualifies because it doesn’t wear out. Inventory doesn’t qualify because it’s held for sale. Personal-use property is out entirely.

Intangibles like patents, copyrights, and goodwill aren’t depreciated. They go through a separate process called amortization. The methods described here apply only to tangible property: equipment, vehicles, buildings, and similar physical assets.

Your Depreciable Basis

Basis is the number every depreciation calculation starts with. It’s generally what you paid, including sales tax, delivery, and installation. If you use the asset part business and part personal, only the business-use share counts. Under MACRS, you do not subtract salvage value when figuring basis; MACRS ignores it entirely.²

When Depreciation Starts

Depreciation starts on the date the asset is “placed in service,” meaning it’s ready and available for its intended use. An uninstalled machine still crated in your warehouse hasn’t been placed in service. Once it’s installed and operational, the clock starts, even if you don’t actually use it that day.

The De Minimis Safe Harbor

For small-dollar purchases, you may not need to depreciate at all. The IRS de minimis safe harbor lets you immediately deduct tangible property costing up to $2,500 per item (or $5,000 if you have audited financial statements), without capitalizing it.³ You make the election annually on your return. Above those thresholds, depreciation rules apply.

MACRS Recovery Periods and Conventions

MACRS runs on two inputs: a recovery period (how many years you spread the deduction across) and a convention (how much you deduct in the first and last years).

Recovery Periods by Property Class

The IRS assigns every depreciable asset to a property class, which fixes the recovery period. You don’t estimate useful life yourself.⁴ The common classes:

3-year property: certain manufacturing tools, tractors, and racehorses over two years old.
5-year property: cars, light trucks, computers, office equipment, and appliances in rental properties.
7-year property: office furniture and most machinery not assigned to another class.
15-year property: land improvements (parking lots, fences, sidewalks, landscaping) and qualified improvement property.
20-year property: farm buildings and certain municipal infrastructure.
27.5-year property: residential rental buildings.
39-year property: nonresidential real property such as offices, retail stores, and warehouses.

Conventions

Three conventions determine how much depreciation you take in the year the asset enters and leaves service:

Half-year convention. The default for most personal property. Every asset is treated as if placed in service halfway through the year, so year one gets half a year’s depreciation and the final year picks up the other half.
Mid-quarter convention. Triggered when more than 40% of the total depreciable basis you place in service during the year falls in the last three months. Once triggered, it applies to every asset placed in service that year, each treated as placed in service at the midpoint of its quarter.⁵
Mid-month convention. Used only for real property. A building placed in service on January 3 gets 11.5 months of depreciation that year.

The Three MACRS Calculation Methods

Under the General Depreciation System (GDS), the standard MACRS track, the IRS assigns one of three methods based on the property class. You can elect a less accelerated method, but not a more accelerated one than what’s assigned.

200% Declining Balance

The most front-loaded method. It doubles the straight-line rate and applies it to the asset’s remaining book value each year. A 5-year asset has a straight-line rate of 20%, so the 200% declining balance rate is 40%, applied to whatever undepreciated balance remains. MACRS automatically switches to straight-line in the year that produces a larger deduction. Assigned to 3-year, 5-year, 7-year, and 10-year property.⁴

150% Declining Balance

A moderately accelerated method using 1.5 times the straight-line rate. Same declining-balance logic, same automatic switch to straight-line. Assigned to 15-year and 20-year property.⁴

Straight-Line

Divide the depreciable basis evenly across the recovery period. A $390,000 commercial building depreciates at $10,000 per year over 39 years, adjusted for the mid-month convention in the first and last years. Mandatory for all real property (27.5-year and 39-year classes) and electable for any other property class.⁴ One catch: if you elect straight-line for a property class, it covers every asset in that class placed in service during the year, and the election is irrevocable.

Section 179 Expensing

Section 179 lets you deduct the full cost of qualifying property in the year you place it in service rather than spreading it across the MACRS period. For 2026, the maximum Section 179 deduction is approximately $2.56 million, up from $2.5 million in 2025, indexed annually.

Qualifying property includes tangible personal property (equipment, machinery, vehicles), off-the-shelf computer software, and certain real property improvements. The real property category covers qualified improvement property along with roofs, HVAC, fire protection and alarm systems, and security systems added to nonresidential buildings after initial construction.²

Two limits can shrink or wipe out your Section 179 deduction:

Investment ceiling. The deduction phases out dollar-for-dollar once total qualifying property placed in service during the year exceeds approximately $4.09 million (for 2026). Once total purchases exceed roughly $6.65 million, Section 179 disappears entirely.
Taxable income limit. Your deduction cannot exceed total taxable income from all active trades or businesses. If the business had a net loss, you get no Section 179 that year. Any amount blocked by the income limit carries forward indefinitely.⁶

Bonus Depreciation After the One Big Beautiful Bill Act

Bonus depreciation changed significantly in mid-2025. The original Tax Cuts and Jobs Act schedule was phasing the bonus percentage down (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, zero after that). The One Big Beautiful Bill Act, signed July 4, 2025, scrapped the phase-out and permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025.⁷

For property placed in service in 2026 and acquired after January 19, 2025, you can deduct 100% of the cost immediately. No investment cap. No taxable income limitation. Qualified property includes assets with a MACRS recovery period of 20 years or less, certain computer software, water utility property, and qualified improvement property. Both new and used assets qualify, though used property must not have been previously used by you and must meet specific acquisition requirements.⁷

The old phase-down percentages still matter for one group: property acquired before January 20, 2025, but placed in service later. If you bought equipment in November 2024 and didn’t place it in service until 2026, the old schedule applies, meaning only 20% bonus depreciation for that asset.

Many states do not conform to federal bonus depreciation. Your state return may require adding back the bonus deduction and depreciating the asset over its full MACRS life for state purposes. Check your state’s conformity rules before counting on state-level savings.

How the Three Tools Stack

The order of application matters when a Section 179 deduction is limited or when you want to split a deduction across years.

First, apply Section 179 to as much of the asset’s cost as the limits allow. Second, apply bonus depreciation to whatever cost remains. Third, calculate regular MACRS on any residual basis. For 2026, the combination of Section 179 and 100% bonus depreciation will typically absorb the entire cost of qualifying personal property in year one. Regular MACRS matters mainly for property that doesn’t qualify for either accelerated provision, or when you deliberately elect out.

Electing out of bonus depreciation is sometimes the better move. If income is low this year but expected to climb, preserving basis for future MACRS deductions at higher tax rates can produce more total savings over time. The election is class-by-class, so you could keep bonus for your 5-year property while opting out for your 7-year property.

The Alternative Depreciation System

The Alternative Depreciation System (ADS) is a separate track within MACRS that uses straight-line only and generally assigns longer recovery periods than GDS. Key ADS periods include 40 years for nonresidential real property (versus 39 under GDS), 30 years for residential rental (versus 27.5), and 12 years for personal property with no assigned class life.⁴

ADS is mandatory for property used predominantly outside the United States, tax-exempt use property, property financed with tax-exempt bonds, and for calculating earnings and profits. You can also voluntarily elect ADS for any class, most commonly in a low-income year when you’d rather save bigger deductions for the future. The election covers all assets in the chosen class placed in service that year and cannot be reversed.

Vehicle and Listed Property Limits

Vehicles and other “listed property” face an extra hurdle. You must use the asset more than 50% for business to claim accelerated depreciation, Section 179, or bonus depreciation. If business use is 50% or below, you’re restricted to straight-line depreciation over the ADS recovery period. If business use drops to 50% or below in a later year after you’ve already claimed accelerated depreciation, you must recapture the excess by adding back the difference between what you actually deducted and what straight-line ADS would have allowed from the start.²

Passenger vehicles also face annual dollar caps regardless of method. For vehicles placed in service in 2026 where 100% bonus depreciation applies, the first-year cap is $20,300. Without bonus, the first-year limit is $12,300. Later years: $19,800 (year two), $11,900 (year three), and $7,160 per year thereafter until basis is fully recovered.⁸ A $60,000 car used 100% for business still takes many years to depreciate fully, even with bonus available. Heavy SUVs and trucks with a gross vehicle weight rating above 6,000 pounds are exempt from the passenger vehicle caps, though Section 179 on heavy SUVs has a separate limit (typically around $30,500, indexed annually).

Depreciation Recapture at Sale

Depreciation gives you deductions on the way in, and the IRS takes some of it back when you sell. The rules differ for personal property and real property.

Section 1245: Personal Property

When you sell depreciable personal property at a gain, the portion of the gain attributable to prior depreciation is taxed as ordinary income, not at capital gains rates. Section 179 and bonus depreciation count the same as regular depreciation for this purpose.⁹ Gain above the total depreciation taken is a capital gain.

Section 1250: Real Property

Buildings get gentler treatment. On a gain sale of depreciable real property, the depreciation you claimed is taxed at a maximum rate of 25%.¹⁰ Gain above the depreciation taken is taxed at the applicable long-term capital gains rate.

Recapture applies even if you didn’t actually claim the depreciation you were entitled to. The IRS recaptures the amount “allowed or allowable,” meaning the larger of what you deducted or what you could have deducted.⁹ Skipping depreciation deductions doesn’t reduce future recapture exposure. If you’re entitled to depreciation, take it.

Reporting Depreciation on Form 4562

Depreciation and immediate expensing deductions are reported on IRS Form 4562. You must file it any year you place new depreciable property in service, claim a Section 179 deduction, or report depreciation on listed property.¹¹ The form mirrors the layered approach:

Part I: Section 179 deductions, including total cost of qualifying property, the investment ceiling, and the final deduction after both limitations.
Part II: bonus depreciation (the “special depreciation allowance”), where you enter the cost and applicable percentage.
Parts III through V: regular MACRS depreciation for property placed in service in the current and prior years, separated by GDS and ADS.
Part VI: listed property, where you document business-use percentages and confirm the 50% threshold.

Totals flow from Form 4562 to your business return: Schedule C for sole proprietors, Form 1065 for partnerships, Form 1120 or 1120-S for corporations.¹²

Keep records for as long as you own the asset plus three years after the return on which you claim the final depreciation deduction or report the sale. Records should include purchase invoices, placed-in-service documentation, business-use logs for listed property, and your annual depreciation calculations. Gaps in documentation are where depreciation deductions get disallowed in audit.

1
Internal Revenue Service. Topic No. 704, Depreciation
2
Internal Revenue Service. Publication 946 – How To Depreciate Property
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Internal Revenue Service. Tangible Property Final Regulations
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Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
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eCFR. 26 CFR 1.168(d)-1 – Half-Year and Mid-Quarter Conventions
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eCFR. 26 CFR 1.179-3 – Carryover of Disallowed Deduction
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Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
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Internal Revenue Service. Rev. Proc. 2026-15
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Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
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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. Instructions for Form 4562