Is Depreciation Tax Deductible? Qualifying Property and Rules

Yes, depreciation is tax deductible. If you own property that you use in a trade or business or hold to produce income, and that property wears out over a useful life of more than one year, federal tax law lets you recover its cost gradually through a depreciation deduction rather than writing it off all at once.¹ The rules decide what qualifies, how fast you can deduct it, and what happens when you eventually sell.

What Has to Be True for the Deduction to Apply

Four conditions have to line up before you can depreciate anything. You must own the property, meaning you bear its financial risks and rewards. You must use it in a business or hold it to produce income; assets used purely for personal enjoyment do not qualify. The property must have a useful life that extends beyond one year, so short-lived supplies remain a current-year expense. And you can only begin depreciating once the property is placed in service, which means it is ready and available for its intended use, even if you have not started using it yet.²

If any one of those fails, depreciation is off the table. A car you drive to work but not for work is personal-use property. A building you own but rent to yourself at no charge is not held to produce income. A machine sitting in a crate in your warehouse, unassembled and unusable, is not yet placed in service.

Property That Qualifies

Most physical business assets are depreciable. The IRS sorts them into property classes under the Modified Accelerated Cost Recovery System (MACRS), each with an assigned recovery period.³ The classes you are most likely to run into:

5-year property: computers, peripherals, office machines like copiers, automobiles, and light trucks.
7-year property: office furniture and fixtures such as desks, filing cabinets, and safes, plus property with no designated class life.
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, retail stores, and warehouses.

Certain intangibles are deducted through amortization rather than depreciation. Goodwill, franchises, trademarks, and trade names acquired as part of a business are amortized over 15 years.⁴ Off-the-shelf computer software — commercially available, licensed nonexclusively, and not substantially modified — is depreciated using the straight-line method over 36 months.¹

Property You Cannot Depreciate

Some property is excluded regardless of how you use it:

Land. It does not wear out or become obsolete, so it has no determinable useful life. When you buy a building and land together, only the building portion is depreciable.
Inventory. Property held primarily for sale to customers is deducted as cost of goods sold, not depreciated.
Personal-use property. Your home, your personal car, and anything else not used in business or held for income do not qualify.
Property placed in service and disposed of in the same tax year. It does not enter the multi-year depreciation process.

The land-versus-building split matters most for real estate investors. When you buy a rental property, you have to allocate the purchase price between the nondepreciable land and the depreciable structure (27.5 years residential, 39 years commercial).²

Mixed Business and Personal Use

Some assets get extra scrutiny because they easily do double duty. Vehicles and certain other items are classified as “listed property.” You can only depreciate the business-use share, and how much business use the asset gets changes the rules.

If you use listed property more than 50% for business, standard MACRS applies. If business use is 50% or less, you must switch to straight-line depreciation over the longer Alternative Depreciation System recovery period. If the asset originally qualified for accelerated depreciation or a Section 179 deduction but business use later drops to 50% or below, you have to recapture the excess depreciation, adding the difference back into income that year.²

You need records to support the business-use percentage. Estimates are not enough. For vehicles, that usually means a mileage log with dates, destinations, and business purpose for each trip.

First-Year Options That Change the Answer

Two provisions let you take a much bigger deduction in year one rather than spreading it out. For many small businesses, they turn a slow multi-year deduction into an immediate write-off.

Section 179 Expensing

Section 179 lets you elect to deduct the full cost of qualifying property in the year you place it in service. Qualifying property includes tangible personal property used in your business — equipment, machinery, vehicles — and certain improvements to nonresidential real property such as roofs, HVAC, fire protection, alarm systems, and security systems.⁵

The deduction is capped. The base limit is $2,500,000, with a phase-out beginning once total qualifying property placed in service exceeds $4,000,000. Both figures are adjusted for inflation starting with tax years beginning after 2025.⁵ The deduction also cannot exceed your taxable business income for the year, so it can zero out income but not create a loss.

Bonus Depreciation

Bonus depreciation (the additional first-year depreciation deduction) lets you deduct a percentage of an asset’s cost on top of regular depreciation. The One Big Beautiful Bill Act restored 100% bonus depreciation for most qualifying business property acquired and placed in service after January 19, 2025, so for 2026 you can generally deduct the full cost of eligible equipment and machinery in the first year.⁶

Bonus depreciation has no dollar cap and can create a net operating loss, unlike Section 179. It typically applies only to new or first-use property, and buildings with long recovery periods generally do not qualify. You can elect out if you would rather spread the deductions across future years.

De Minimis Safe Harbor

If you buy inexpensive items, you may not need to depreciate them at all. The de minimis safe harbor lets you deduct items costing $2,500 or less per invoice (or per item) in the year of purchase. You need a written accounting policy in place at the start of the tax year and you make the election annually on your return.⁷

Repair or Improvement? The Line That Decides Everything

Fixing a leak, repainting, or replacing a broken window is a repair, deductible in full the year you pay for it. A capital improvement gets depreciated over the asset’s recovery period. Getting the classification wrong is one of the most common depreciation mistakes.

The IRS uses three tests. If the spending meets any one, it is a capital improvement:

Betterment: it fixes a pre-existing defect, materially adds to the property, or materially increases capacity, productivity, or output.
Restoration: it replaces a major component or substantial structural part, or returns a non-functional asset to working condition.
Adaptation: it changes the property to a new or different use from how you originally placed it in service.

Spending that meets none of the three is a repair.⁷

How the Deduction Gets to Your Return

Depreciation and amortization are reported on IRS Form 4562, which asks for a description of each asset, the date placed in service, the recovery period, the method used, and the calculated deduction.⁸ The total flows to your main return: Schedule C for sole proprietors,⁹ Schedule E for most landlords,¹⁰ or Form 1120 for corporations.

The annual amount depends on the asset’s cost basis (purchase price plus items like sales tax, delivery, and installation), its MACRS recovery period, the depreciation method (straight-line or declining balance), and the applicable convention (usually half-year for personal property, mid-month for real property). Publication 946 contains percentage tables that fold all of these variables together, so most filers look up the deduction rather than computing it from scratch.²

Recapture When You Sell

Depreciation lowers your taxable income while you own the asset, but the IRS takes some of that benefit back when you sell for more than the depreciated basis.

For personal property such as equipment, vehicles, and machinery, Section 1245 taxes the gain attributable to prior depreciation (including Section 179 deductions) at ordinary income rates rather than capital gains rates. Only gain above the total depreciation qualifies for capital gains treatment.¹¹

Real property placed in service after 1986 is mostly depreciated straight-line, so full Section 1250 recapture rarely applies. What you usually see instead is “unrecaptured Section 1250 gain,” the portion of your gain tied to straight-line depreciation, taxed at a maximum federal rate of 25%. Gain above the depreciation amount is taxed at the applicable capital gains rate.¹²

One trap catches people who tried to skip the deduction. Recapture is calculated on depreciation “allowed or allowable,” meaning the amount you were entitled to deduct whether you actually claimed it or not.¹¹ Not claiming depreciation does not save you from the recapture tax later.

Keep the records that support your deductions. Purchase receipts, invoices showing cost, the date placed in service, and business-use logs where relevant should be held through the entire recovery period, since recapture can still apply that long.²

1
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
2
Internal Revenue Service. Publication 946, How To Depreciate Property
3
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
4
Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
5
Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
6
Internal Revenue Service. One, Big, Beautiful Bill Provisions
7
Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions
8
Internal Revenue Service. About Form 4562, Depreciation and Amortization
9
Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)
10
Internal Revenue Service. Topic No. 414, Rental Income and Expenses
11
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
12
Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets