How to Project Depreciation: MACRS, Section 179, and Form 4562

To project depreciation, gather three numbers for each asset — cost basis, salvage value, and useful life — then apply the method that fits your purpose: straight-line, double declining balance, or units of production for internal books and financial statements, and the Modified Accelerated Cost Recovery System (MACRS) for your federal tax return. From there, layer in any first-year expensing you plan to claim, respect the caps on vehicles and listed property, and record the result on a depreciation schedule that ties back to Form 4562. The math is not hard once the inputs and the method are set; the work is picking the right method for the right purpose and keeping the two projections separate.

The Three Inputs Every Projection Needs

Cost basis is more than the sticker price. It includes every expense necessary to get the asset up and running: purchase price plus freight, sales tax, installation and testing fees, excise taxes, and legal fees that must be capitalized.¹ Pull these numbers from purchase orders and vendor invoices so nothing gets missed.

Salvage value is what you expect the asset to be worth when you’re done with it. For book depreciation and internal budgeting, subtract salvage value from cost basis before calculating the annual deduction. For MACRS tax depreciation, the IRS percentage tables already account for this, so you apply them to the full basis without subtracting salvage value separately.

Useful life is how many years the asset should stay productive. For internal reporting, document your reasoning. For tax purposes, your estimate does not matter: the IRS assigns a fixed recovery period by asset class.

Projecting Book Depreciation

Straight-Line

The simplest method divides the depreciable amount evenly across the asset’s life. Subtract salvage value from cost basis, then divide by the number of years. A $10,000 machine with a $2,000 salvage value and a five-year life produces a $1,600 deduction every year. The consistency makes straight-line the default for financial statements, and it is the method most lenders and investors expect to see on a balance sheet.

Double Declining Balance

This accelerated method front-loads deductions by applying a fixed rate to the shrinking book value each year. The rate is double the straight-line percentage. For a five-year asset, the straight-line rate is 20%, so the double declining rate is 40%. In year one, a $10,000 asset produces a $4,000 deduction. In year two, apply 40% to the remaining $6,000 book value for a $2,400 deduction. Each year gets smaller.

One thing to watch when you project this out: total depreciation can never push book value below salvage value. The annual formula ignores salvage value, but salvage value acts as a floor. Most practitioners switch to straight-line partway through the schedule to fully depreciate the asset without overshooting.

Units of Production

When wear depends on usage rather than time, project by output instead of years. Divide the depreciable amount (cost minus salvage) by the total units the asset is expected to produce over its life, then multiply the per-unit figure by actual units in each year. A printing press with a $50,000 depreciable cost and a 500,000-impression life generates $0.10 per impression; a year of 80,000 impressions produces an $8,000 deduction. This method is a good fit for mining equipment, vehicles measured by mileage, and manufacturing machinery.

Projecting MACRS for Federal Tax

For federal returns, you do not choose the method. The IRS requires MACRS for most tangible property placed in service after 1986.² MACRS assigns each asset to a property class with a fixed recovery period, and IRS percentage tables tell you exactly how much to deduct each year. Your own estimate of useful life is irrelevant here.

Recovery Periods

Under the General Depreciation System (GDS), which is the default, common classes include:

5-year property: automobiles, light trucks, computers, copiers, and certain research equipment.
7-year property: office furniture and fixtures such as desks, filing cabinets, and safes.
27.5-year property: residential rental buildings where at least 80% of gross rental income comes from dwelling units.
39-year property: nonresidential real property like office buildings, warehouses, and retail stores.

Classes span from 3 to 39 years. If an asset does not fit a common category, the Table of Class Lives and Recovery Periods in Publication 946 covers nearly everything.³

Conventions Decide When Depreciation Starts

MACRS does not care whether you bought equipment on January 2 or November 30. Standardized conventions determine first-year and last-year amounts.

The half-year convention is the default. Every asset is treated as placed in service at the midpoint of the year, so you get half a year’s depreciation in the first year and half in the final year, regardless of the actual purchase date.²

The mid-quarter convention applies when more than 40% of your total depreciable asset bases for the year are placed in service during the last three months. When it triggers, it applies to all property placed in service that year, and each asset gets depreciation from the midpoint of the quarter it was acquired. Year-end buying sprees can backfire if you are not watching this threshold.

Real property uses a mid-month convention, with depreciation running from the midpoint of the month the property is placed in service.

First-Year Expensing That Changes the Projection

Before you spread an asset over five or seven years, check whether you can write off most or all of it in year one.

Section 179

Section 179 lets you deduct the full purchase price of qualifying business property in the year it is placed in service, up to an annual cap. For tax years beginning in 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, and it disappears at $6,650,000.⁴ Sport utility vehicles face a separate cap of $32,000.² The deduction also cannot exceed your taxable income from active business operations for the year; unused amounts carry forward.

Bonus Depreciation

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

You can elect a reduced 40% rate (or 60% for property with longer production periods and certain aircraft) for qualified property placed in service during the first tax year ending after January 19, 2025. That election makes sense when you want to preserve deductions for higher-income years rather than take the full write-off immediately.

Vehicles and Listed Property Have Hard Caps

The IRS caps annual depreciation on passenger automobiles regardless of method. Even with 100% bonus depreciation, you cannot exceed the ceiling. For vehicles placed in service in 2026:⁶

With bonus depreciation: $20,300 first year, $19,800 second year, $11,900 third year, $7,160 each year after.
Without bonus depreciation: $12,300 first year, $19,800 second year, $11,900 third year, $7,160 each year after.

These limits apply to the business-use percentage of the vehicle. If a car is used 75% for business, multiply each limit by 0.75.

Vehicles and certain other assets are “listed property,” which requires more than 50% qualified business use. If business use drops to 50% or below in any year, you lose MACRS accelerated depreciation for that asset and must switch to the Alternative Depreciation System (ADS) straight-line method. You also have to recapture excess depreciation already claimed and include it as ordinary income.² That recapture surprises owners who gradually shift a vehicle to personal use.

Small Purchases You Do Not Project at All

Not everything belongs on a depreciation schedule. The de minimis safe harbor election lets you expense low-cost items immediately instead of capitalizing and depreciating them. With an applicable financial statement (audited financials, for example), the threshold is $5,000 per invoice or item. Without one, the threshold is $2,500 per invoice or item.⁷ You make the election annually by attaching a statement to your return. It keeps laptops, tools, and low-cost furniture off your schedule for years.

Projecting Recapture on a Future Sale

Depreciation deductions reduce your basis over time. When you sell for more than adjusted basis, the IRS wants some of the tax benefit back, and any honest projection of an asset’s after-tax value has to include this.

For personal property like equipment, vehicles, and machinery, Section 1245 taxes any gain attributable to prior depreciation as ordinary income, not at the lower capital gains rate.⁸ Buy a machine for $50,000, claim $30,000 in depreciation, sell for $35,000: the entire $15,000 gain is ordinary income because it sits inside the $30,000 of prior depreciation.

Real property gets slightly better treatment. Depreciation on real estate produces “unrecaptured Section 1250 gain,” taxed at a maximum rate of 25% rather than your ordinary income rate.⁹ Any gain above the total depreciation claimed is taxed at regular capital gains rates.

Building the Schedule and Filing

The projection has to live somewhere. A depreciation schedule is the master record for every depreciable asset you own. Each entry lists the asset description, date placed in service, cost basis, recovery period, method, and convention. For each year, record the annual expense and a running total of accumulated depreciation so book value is visible at a glance. The IRS expects records showing the specific identification of each asset, how it was acquired, and the date it was placed in service.² For listed property, keep logs of business versus personal use for each tax year.

Form 4562

Report depreciation on Form 4562. File it if you are claiming depreciation on property placed in service during the current tax year, taking a Section 179 deduction, depreciating any vehicle or listed property regardless of when it was placed in service, or claiming depreciation on a corporate return other than an S corporation return.³ If your only depreciable assets were placed in service in prior years and none are listed property, report depreciation directly on your Schedule C or other applicable form without a separate Form 4562.

How Long to Keep the Records

Depreciation records outlast most tax documents. Keep property records until the statute of limitations expires for the year you dispose of the asset.¹⁰ The general limitations period is three years from the filing date, extending to six if you underreport income by more than 25%. Losing the records means losing the ability to prove basis, which can leave the IRS treating your entire sale proceeds as taxable gain.

1
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
2
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
3
Internal Revenue Service. Instructions for Form 4562 (2025)
4
Internal Revenue Service. Rev. Proc. 2025-32
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
Internal Revenue Service. Rev. Proc. 2026-15
7
Internal Revenue Service. Tangible Property Final Regulations
8
Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
9
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
10
Internal Revenue Service. How Long Should I Keep Records