How to Forecast Depreciation: MACRS, Section 179, and Recapture

To forecast depreciation, you project how much of an asset’s cost you will expense each year by fixing four inputs (cost basis, salvage value, useful life, and placed-in-service date), applying the depreciation method that fits your purpose, and rebuilding the schedule whenever the asset, its use, or the tax rules change. For federal taxes, the Modified Accelerated Cost Recovery System under 26 U.S.C. § 168 governs most business property, and errors in the inputs can cascade through every year of the schedule and trigger accuracy-related penalties of 20% on any resulting underpayment.¹

The Four Inputs Every Forecast Starts With

Get these wrong and every year of the schedule is wrong. Take the time here.

Cost basis. The purchase price plus sales tax, freight, installation, testing, and any other cost you had to pay to get the asset ready for use.²
Salvage value. What you expect the asset to be worth when you are done with it. MACRS treats salvage value as zero for tax purposes, but you still need an estimate for book depreciation on financial statements.³
Useful life. How long the asset stays economically productive. For tax, the IRS assigns recovery periods by property class rather than letting you pick a number.³
Placed-in-service date. The date the asset is ready and available for its intended use, whether or not you actually start using it that day. This date decides which tax year the clock starts.³

Alongside these, identify the property class. Publication 946 groups assets by recovery period: computers and similar technology are five-year property, office furniture and fixtures are seven-year property, and so on.³ Misclassifying an asset changes every number in the forecast and can draw audit attention.

Picking a Method

Three methods cover most forecasts. Which one you use depends on whether the schedule is for tax or for financial statements, and on how the asset actually wears out.

Straight-line subtracts salvage from basis and divides by useful life. The annual expense is identical every year, which is why it dominates financial-statement reporting and why the Alternative Depreciation System uses it for tax.

Double declining balance front-loads the expense. You apply a fixed rate (twice the straight-line rate) to the declining book value each year. A $50,000 asset with a five-year life uses a 40% rate, producing $20,000 of depreciation in year one and $12,000 in year two. Under MACRS, the IRS uses 200% declining balance for most personal property and then switches to straight-line partway through the recovery period so the asset finishes fully depreciated.⁴

Units of production ties expense to output rather than time. Divide depreciable cost by total estimated units (miles, hours, copies) to get a per-unit charge. Expense rises in heavy-production years and falls when the equipment sits idle. The IRS allows this method for property you elect out of MACRS, but most tax depreciation still runs through MACRS.³

MACRS Mechanics for a Tax Forecast

If the forecast feeds a federal tax return, MACRS is almost certainly the system. It assigns each asset a recovery period and method and treats salvage value as zero.⁴

The General Depreciation System is the default: shorter recovery periods, accelerated methods (200% declining balance for most personal property). The Alternative Depreciation System uses longer recovery periods and straight-line. ADS is required for certain property, including assets used predominantly outside the United States and tax-exempt use property, and you can also elect it voluntarily.⁴

Common GDS recovery periods are 3, 5, 7, 10, 15, and 20 years for personal property, 27.5 years for residential rental buildings, and 39 years for nonresidential commercial buildings.⁴

Half-Year and Mid-Quarter Conventions

MACRS does not let you claim a full year of depreciation for property placed in service partway through the year. The default half-year convention treats every asset as placed in service at the midpoint of the tax year, so you get half a year of depreciation in both the first and last years of the recovery period.⁴

A different rule kicks in if year-end purchases dominate. When more than 40% of the total depreciable property you place in service during a tax year enters service in the last three months, the mid-quarter convention applies to everything placed in service that year. It treats each asset as placed in service at the midpoint of the quarter it actually entered use, which usually reduces the first-year deduction on late-year purchases.⁴ Residential rental and nonresidential buildings are excluded from that 40% test and use a mid-month convention instead.

First-Year Expensing That Rewrites the Forecast

Before building a multi-year MACRS schedule, check whether the whole cost can come off in year one. Two provisions make that possible, and each changes the shape of the forecast completely.

Section 179

Section 179 lets you deduct the full purchase price of qualifying business property in the year you place it in service, up to an annual cap. For 2026 the maximum deduction is $2,560,000, and the deduction begins phasing out dollar-for-dollar once total qualifying property placed in service exceeds $4,090,000.⁵ Both thresholds adjust annually for inflation. The deduction is also capped at taxable income from active business operations, so Section 179 cannot create or increase a net loss.

Any cost above the Section 179 limit, or that you choose not to expense, follows the regular MACRS schedule. A useful forecast models both paths so the multi-year impact of expensing versus depreciating is visible.

Bonus Depreciation

The One Big Beautiful Bill Act reinstated permanent 100% bonus depreciation for qualifying property acquired after January 19, 2025.⁶ For most new assets placed in service in 2026, that means the entire cost comes off in year one, and there is currently no scheduled expiration.

Watch the acquisition date, not just the placed-in-service date. Property acquired before January 20, 2025, but placed in service in 2026 still follows the old phase-down, and the bonus rate for those assets is only 20%.⁷ Unlike Section 179, bonus depreciation has no dollar cap and no taxable-income limit, so it can generate or enlarge a net operating loss.

Vehicle Caps and Listed Property

Passenger automobiles carry annual depreciation caps that override both MACRS and bonus depreciation. For vehicles placed in service in 2026 where bonus depreciation applies, the maximum first-year deduction is $20,300. Without bonus depreciation the first-year cap is $12,300. The caps for later years are $19,800 in year two, $11,900 in year three, and $7,160 in each year after that until the vehicle is fully depreciated.⁷

Practically, a $55,000 car with 100% business use will not be fully written off in five years the way a $55,000 piece of office equipment can be. A vehicle forecast has to map the annual caps year by year because recovery routinely stretches past the standard five-year MACRS life.

Vehicles and certain other assets the IRS considers prone to personal use (cameras, sound equipment, and similar items) are listed property. If business use drops to 50% or less in any year, you lose access to accelerated depreciation, must switch to straight-line under ADS, and have to recapture excess depreciation claimed in prior years by adding it back to income.³ Any credible vehicle forecast includes a sensitivity check for a drop in the business-use percentage.

Laying Out the Year-by-Year Schedule

With the method, recovery period, and convention set, the math is repetitive. A depreciation schedule is a table with five columns for each year: beginning book value, depreciation expense, accumulated depreciation, ending book value, and the tax deduction if it differs from book.

Take a $50,000 machine, no salvage, five-year GDS recovery, half-year convention, straight-line. Year one shows $5,000 (half the $10,000 annual amount). Years two through five each show $10,000. Year six shows the remaining $5,000. The half-year convention adds a sixth year to a five-year recovery period, and every dollar of original cost is accounted for by the end.

For an accelerated schedule the rate applies to declining book value, so you recalculate each year. Publication 946 publishes percentage tables that already fold in the switch from declining balance to straight-line at the optimal point, and using those tables is faster and less error-prone than running the formula by hand.³

If Section 179 or bonus depreciation absorbs the whole cost, the tax schedule is trivial: 100% in year one, zeros after. You still need a separate book schedule if you keep GAAP financial statements, because those provisions are tax-only.

Running Tax and Book Side by Side

Most businesses maintain two depreciation schedules, one for tax returns and one for financial statements, and the difference between them shows up on the balance sheet.

Tax depreciation is faster than book depreciation in nearly every case involving MACRS, Section 179, or bonus depreciation. That timing gap creates a deferred tax liability. In early years, taxable income sits below book income because tax depreciation outpaces book. Later, the tax deduction shrinks or disappears while book depreciation continues, taxable income exceeds book income, and the deferred liability reverses. A complete forecast tracks both schedules side by side along with the cumulative timing difference.

Events That Force You to Revise the Forecast

A depreciation schedule is not set-and-forget. Several events reopen it.

Capital Improvements

A significant improvement to an existing asset is treated as a separate piece of depreciable property with its own recovery period and method. It is not added to the original asset’s remaining balance.³ Replace the roof on a commercial building and the new roof starts its own 39-year recovery period even if the building is halfway through its schedule. The forecast gets a new line for each improvement. Ordinary repairs that do not rise to a betterment, restoration, or adaptation to new use are deducted as current-year expenses.

Disposal Before the End of the Recovery Period

Sell, scrap, or abandon the asset early and the schedule stops. You claim a partial-year deduction for the year of disposal using the same convention that applied at the start, and any remaining book value is cleared. The difference between sale proceeds and adjusted basis is your gain or loss and feeds into the recapture rules below.

Changes in Use

If property shifts between business and personal use, the deduction changes with it. For listed property, dropping below 50% business use triggers the recapture and method-change rules noted above. Even for non-listed property, less business use means a smaller deduction that year. Note the assumed business-use percentage on the forecast and flag it for annual review.

Building Recapture Into the Projection

Depreciation reduces your tax basis, so a sale above that reduced basis pulls prior deductions back into income. A forecast that stops at the deduction side of the ledger misses this.

For personal property under Section 1245 (equipment, vehicles, other personal business property), all gain attributable to prior depreciation is taxed as ordinary income rather than at capital-gains rates.⁸ Only gain above the original cost basis reaches capital-gain treatment, which is rare for depreciable equipment.

For real property under Section 1250, buildings depreciated under straight-line (which is every building under current MACRS) face a separate regime. The depreciation-related portion of the gain, known as unrecaptured Section 1250 gain, is taxed at a maximum rate of 25%.⁹ Gain beyond that portion qualifies for the standard long-term capital gains rate. Every dollar of building depreciation you claim will eventually be taxed at up to 25% if the property sells at a gain.

Aggressive first-year expensing through Section 179 or bonus depreciation maximizes the current-year deduction and also maximizes recapture if you sell soon. A complete forecast puts projected recapture next to projected deduction savings across the expected holding period. Selling a fully expensed asset two years after purchase can wipe out much of the initial tax savings, and the IRS charges interest on underpayments from the original return due date.¹⁰

State Conformity

Federal depreciation rules do not carry over automatically to state tax returns. States vary widely in how they treat bonus depreciation and Section 179: some conform fully, some partially, and some decouple entirely, which means a separate depreciation schedule for state purposes. Multi-state operations can produce several parallel forecasts. Check each state’s current conformity rules yearly, because legislatures change them often.

1
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
2
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
3
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
4
Office of the Law Revision Counsel. 26 USC 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. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
7
Internal Revenue Service. Rev. Proc. 2026-15
8
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
9
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
10
Internal Revenue Service. Interest