How to Read a Depreciation Schedule: Columns, Methods, and Book Value

A depreciation schedule is a line-by-line ledger of every long-term asset a business owns, and learning how to read a depreciation schedule means following eight or so columns from left to right: what the asset is, when it went into service, what it cost, how long the IRS makes you spread the deduction, which method and timing rule apply, what’s already been written off, what you’re writing off this year, and what’s left on the books. Every other number on the page is derived from those.

The Columns, Left to Right

Most schedules, whether produced by accounting software or a tax preparer’s workpaper, share the same layout. Each column feeds the next.

Asset description. A short label like “2024 Ford Transit” or “warehouse HVAC system,” so you can match a line to something the business actually uses.
Date placed in service. The date the asset became ready and available for use, which is not always the purchase date. Buy a machine in November, install it in January, and January controls. This date sets which tax year depreciation begins and which convention applies.
Cost basis (unadjusted basis). Total invested to get the asset running: purchase price, sales tax, shipping, installation.
Recovery period. The number of years the IRS makes you spread the deduction over.
Method and convention. The depreciation formula (usually MACRS with 200% declining balance for equipment) and the timing rule that governs the first and last year.
Prior depreciation. Cumulative deductions taken in previous tax years.
Current-year depreciation. The deduction for the year you’re looking at.
Net book value (adjusted basis). Cost basis minus all depreciation taken to date.

The IRS does not require you to attach the full schedule to a return, but you must keep the underlying records permanently. Form 4562 summarizes the year’s total deductions and bridges your internal schedule to the return itself.¹

Cost Basis: Where the Starting Number Comes From

Every calculation on the schedule flows from the cost basis column, so an error here ripples through every year. Under federal tax law the basis of property is generally its cost.² “Cost” is broader than the sticker price. Sales tax, delivery, installation, and any other expense needed to get the asset into working condition roll into basis. A $45,000 truck with $3,200 in sales tax and $800 in dealer prep shows a depreciable basis of $49,000.

The unadjusted basis stays fixed unless you make a capital improvement or dispose of part of the asset. Routine repairs don’t touch basis; they’re current-year expenses. Adding a lift gate to that truck or replacing a building’s roof does increase basis, and the improvement typically starts a new line on the schedule with its own placed-in-service date and recovery period.

When you’re reviewing a schedule you didn’t build, the first sanity check is whether the basis matches the original invoice or closing statement. Numbers that look too round, or too low, often mean ancillary costs were dropped or expensed in the wrong place.

Recovery Periods and Property Classes

The IRS assigns every depreciable asset to a property class, and each class carries a fixed recovery period. You don’t pick the timeline; the classification picks it for you.³ The classes that show up most often on a small business schedule:

5-year property: computers, copiers, cars, light trucks, some manufacturing equipment.
7-year property: office furniture, desks, filing cabinets, most machinery not classified elsewhere.
15-year property: land improvements such as parking lots, fences, and landscaping.
27.5-year property: residential rental buildings.
39-year property: commercial buildings and other nonresidential real property.

The class matters because it controls both the speed and the method of depreciation. Shorter periods mean bigger annual deductions. If an asset sits under the wrong period, every deduction tied to that line is wrong too.⁴

Method and Convention: Why Year One Looks Different

MACRS is the default depreciation system for nearly all tangible business property placed in service after 1986. For most personal property (equipment, vehicles, furniture) it uses the 200% declining balance method, which front-loads deductions. On a 7-year asset, the first-year MACRS rate is 14.29%; year two jumps to 24.49%. The method automatically switches to straight-line partway through the recovery period, once straight-line produces the larger deduction.³

Real property works differently. Residential rental and commercial buildings both use straight-line depreciation over 27.5 and 39 years respectively, so the deduction is roughly level each year.⁴

The Three Conventions

The convention column tells you the timing rule that governs year one and the disposal year.

Half-year convention. The default for most personal property. Regardless of the actual placed-in-service date, the asset is treated as placed in service at the midpoint of the year, so you get half a year of depreciation in year one and half a year in the final recovery year.
Mid-quarter convention. Triggered when more than 40% of the total depreciable basis of all personal property placed in service during the year lands in the last three months. It keeps businesses from buying everything in December and claiming a full half-year. Each asset is then treated as placed in service at the midpoint of the quarter it was actually acquired.
Mid-month convention. Applies to all real property. A building purchased on March 3 gets the same first-year deduction as one purchased on March 28.

The convention is why first-year and final-year numbers on a schedule often look smaller than the years in between.⁴

GDS Versus ADS

Most lines use the General Depreciation System (GDS), the standard MACRS approach described above. You’ll occasionally see the Alternative Depreciation System (ADS), which uses longer recovery periods and straight-line depreciation. ADS is required for property used predominantly outside the United States, property leased to tax-exempt organizations, and listed property used 50% or less for business. Some taxpayers elect it voluntarily for specific assets. A line showing a longer-than-expected recovery period with straight-line depreciation is usually ADS.³

When an Asset Is Fully Written Off in Year One

Two provisions let a business deduct large chunks of an asset’s cost immediately, and both show up on the schedule.

Section 179

Section 179 lets a business elect to deduct the full cost of qualifying equipment and software in the year it’s placed in service. For 2026 the maximum deduction is $2,560,000, phasing out once total qualifying property placed in service exceeds $4,090,000. These limits are indexed annually from statutory base amounts of $2,500,000 and $4,000,000.⁵

One catch: the Section 179 deduction cannot exceed the business’s taxable income from active operations for the year. Earn $80,000, buy $120,000 of equipment, and you can only expense $80,000 under Section 179. The remaining $40,000 carries forward. On the schedule, the Section 179 amount is pulled out of the asset’s basis before regular MACRS is applied to whatever remains.

Bonus Depreciation

Bonus depreciation works alongside, or instead of, Section 179 to accelerate first-year deductions. The One Big Beautiful Bill Act, signed August 5, 2025, permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. Unlike Section 179, bonus has no dollar cap and no taxable income limit, so it can create or increase a net operating loss.⁶

An asset taking 100% bonus depreciation shows a full write-off in year one, and its net book value drops to zero right away. Where a business elected out of bonus for a class of property, you’ll see standard MACRS deductions spread across the normal recovery period instead.⁷

Vehicle Caps and the Business-Use Percentage Column

Even with Section 179 and bonus depreciation on the table, passenger vehicles hit separate annual caps under Section 280F that override the normal rules. For vehicles placed in service in 2026, the maximum deductions are:⁸

With bonus depreciation: $20,300 (year 1), $19,800 (year 2), $11,900 (year 3), $7,160 (each year after).
Without bonus depreciation: $12,300 (year 1), $19,800 (year 2), $11,900 (year 3), $7,160 (each year after).

A $55,000 sedan used entirely for business will take well over six years to depreciate fully, even though it’s classified as 5-year property. A vehicle line with an unusually small first-year deduction relative to its cost is almost always a Section 280F cap at work. Heavy SUVs and trucks with a gross vehicle weight rating above 6,000 pounds are exempt from those caps, which is why they show up with much larger first-year numbers.

Vehicles are also “listed property,” which gets extra scrutiny. If business-use percentage drops to 50% or below, the asset loses access to MACRS accelerated depreciation and bonus depreciation entirely, moves to ADS, and may trigger recapture of excess deductions from prior years. Listed property typically appears on the schedule with a separate business-use percentage column, and that percentage is multiplied against the otherwise-allowable deduction. A $19,800 second-year MACRS deduction on a vehicle used 70% for business becomes $13,860.

A point of confusion on older schedules: the Tax Cuts and Jobs Act removed computers and peripheral equipment from listed property starting in 2018. A laptop placed in service after 2017 should not carry a business-use percentage column, even though older schedules often kept the format.⁹

Prior, Current, Accumulated, and Net Book Value

The right side of the schedule shows what the rules above produced.

Prior depreciation is the running total of every deduction taken in previous tax years. It should match what was reported on each prior Form 4562. When it doesn’t, either a deduction was missed or an error has been carrying forward.

Current-year depreciation is the deduction for the year you’re reviewing. It flows directly to Form 4562 and reduces taxable income. For a first-year asset it might be the full cost (100% bonus or Section 179), a half-year MACRS percentage, or a capped vehicle amount, depending on which rules govern the line.

Accumulated depreciation is prior plus current. It can never exceed cost basis. If it does, something is wrong on the schedule.

Net book value, also called adjusted basis, equals cost basis minus accumulated depreciation. It’s the most consequential number when you’re thinking about a sale, because it decides whether the sale produces a gain or a loss. An asset with an $8,000 net book value sold for $12,000 produces a $4,000 gain; sold for $5,000 it produces a $3,000 loss.¹⁰

Why the Net Book Value Column Matters at Sale

The lower an asset’s net book value, the larger the potential recapture tax when you sell it. For depreciable personal property, Section 1245 requires that any gain up to the total depreciation previously deducted be taxed as ordinary income rather than at the lower capital gains rate. Only gain above the original cost gets capital gains treatment, and most used equipment doesn’t sell for more than it cost.¹¹

Buy a machine for $50,000, take $30,000 in depreciation (net book value $20,000), sell it for $35,000, and the $15,000 gain is all ordinary income under Section 1245 because it falls inside the $30,000 of depreciation already claimed.

Buildings work slightly differently. Because they use straight-line, there’s no excess depreciation to recapture as ordinary income; instead, depreciation on the building is taxed as unrecaptured Section 1250 gain at a maximum rate of 25%, with any additional gain above original cost taxed at regular capital gains rates.¹⁰

Fixing Errors You Spot on the Schedule

Missed depreciation and misclassified assets happen more often than most business owners realize, especially when schedules roll forward year after year without a fresh review. Form 3115, Application for Change in Accounting Method, lets you correct depreciation errors (wrong recovery period, wrong method, or depreciation never claimed) by filing under the automatic change procedures. You attach the form to the current-year return, and the IRS allows a one-time catch-up called a Section 481(a) adjustment that accounts for all the depreciation missed in prior years. When the correction produces additional deductions, the full catch-up is taken in the year of change. No user fee applies for automatic changes.¹²

Letting an error ride is expensive. The IRS reduces your basis for depreciation “allowed or allowable,” meaning they treat you as if you took the deduction whether you actually did or not. If you’re reading through a schedule and find an asset that was never depreciated or landed in the wrong property class years back, Form 3115 is the way to recover those deductions before the basis reduction locks the loss in permanently.

1
Internal Revenue Service. 2025 Instructions for Form 4562
2
Office of the Law Revision Counsel. 26 US Code 1012 – Basis of Property Cost
3
Office of the Law Revision Counsel. 26 US Code 168 – Accelerated Cost Recovery System
4
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
5
Office of the Law Revision Counsel. 26 US Code 179 – Election To Expense Certain Depreciable Business Assets
6
Internal Revenue Service. One, Big, Beautiful Bill Provisions
7
Internal Revenue Service. Notice 2026-11, Interim Guidance on Additional First Year Depreciation Deduction
8
Internal Revenue Service. Rev Proc 2026-15
9
Internal Revenue Service. Tax Cuts and Jobs Act: A Comparison for Businesses
10
Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets
11
Office of the Law Revision Counsel. 26 US Code 1245 – Gain From Dispositions of Certain Depreciable Property
12
Internal Revenue Service. Instructions for Form 3115