Depreciation inside an LLC is calculated at the entity level and then passed through to each member’s personal return, so the LLC itself pays no tax on the deduction but every member sees their share of it on a Schedule K-1. The rules that govern how much the LLC can write off, how fast, and whether a given member can actually use the resulting loss are the heart of LLC depreciation rules, and in 2026 they sit at an unusually favorable moment: 100% bonus depreciation is back permanently, the Section 179 cap sits above $2.5 million, and the standard MACRS schedules still run underneath both.
What follows is how those pieces fit together, and the three limits that decide whether the deduction on your K-1 is one you can actually take.
What an LLC Can Depreciate
To be depreciable, an asset has to have a useful life longer than one year, lose value over time, and be used in a trade or business or held to produce income. Inventory, supplies the business burns through within a year, and anything used personally don’t qualify.
Land is the exclusion that catches real estate LLCs off guard. Land doesn’t wear out, so the IRS doesn’t allow any depreciation on it. When the LLC buys a property, the purchase price has to be split between the land and the building, and only the building portion goes on the depreciation schedule. The two defensible ways to make that split are the ratio from the county property tax assessment or a professional appraisal. Picking a round number like 80/20 because it looks reasonable will draw questions on audit.
The number the whole calculation starts from is the asset’s basis: the purchase price plus the costs of getting it in service, such as shipping, installation, and sales tax. That basis is the ceiling on total depreciation the LLC can ever claim on the asset.
The Three Methods Available in 2026
MACRS as the Default
For almost all tangible business property placed in service after 1986, the Modified Accelerated Cost Recovery System is the required method unless the LLC elects something else.1Internal Revenue Service. Topic No. 704, Depreciation MACRS sorts assets into recovery-period classes based on the type of property, not how long the LLC actually plans to use it. The classes an LLC runs into most often:
- 5-year property: automobiles, computers, copiers, research equipment.
- 7-year property: office furniture and fixtures like 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 estate such as office buildings, warehouses, and retail stores.
Shorter-lived assets use the 200% declining balance method, which front-loads the deductions into the early years.2Internal Revenue Service. Publication 946, How to Depreciate Property Timing conventions determine how much of year one you actually get: the half-year convention is the default for personal property, the mid-month convention applies to buildings, and the mid-quarter convention takes over when more than 40% of the year’s personal property basis lands in the last three months.3eCFR. 26 CFR 1.168(d)-1 – Half-Year and Mid-Quarter Conventions That last rule exists to stop entities from bunching December purchases to grab an outsized first-year write-off.
Section 179 Immediate Expensing
Instead of stretching deductions over years, an LLC can elect to deduct the full cost of qualifying property in the year it’s placed in service. For 2026 the base statutory deduction limit is $2,500,000, subject to inflation adjustment, and it phases out dollar-for-dollar once the LLC puts more than $4,000,000 of Section 179 property in service during the year.4Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets
The important ceiling is the income cap. A Section 179 deduction cannot exceed the LLC’s aggregate taxable income from active trades or businesses, so it cannot create or increase a net operating loss. Anything over the cap carries forward until the LLC has enough income to absorb it. The election goes on Form 4562, attached to the entity return.5Internal Revenue Service. About Form 4562, Depreciation and Amortization
100% Bonus Depreciation Is Back
The bonus depreciation picture changed in 2025. The old phase-out had the allowable percentage at 60% for 2024 and heading down to 40% and then 20%. The One, Big, Beautiful Bill permanently restored 100% bonus depreciation for qualified property that is both acquired and placed in service after January 19, 2025.6Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
Qualified property is new or used tangible personal property with a MACRS recovery period of 20 years or less. Unlike Section 179, bonus depreciation isn’t capped by the LLC’s taxable income, so it can create or deepen a loss that flows to members. The other side of that power: bonus depreciation is mandatory unless the LLC affirmatively elects out for an entire class of property for the year.
For most LLCs buying equipment in 2026, the result is that the full cost of qualifying assets can be written off immediately, either through 100% bonus depreciation or Section 179. The choice turns on whether the LLC has enough active income to use a Section 179 election, or prefers the loss-generating flexibility of bonus depreciation.
The Passenger Vehicle Boundary
Passenger automobiles sit outside this generosity. Section 280F caps annual depreciation on cars and light trucks no matter which method the LLC uses. For vehicles placed in service in 2026 with bonus depreciation, the year-one cap is $20,300, dropping to $19,800 in year two, $11,900 in year three, and $7,160 each year after; without bonus, year one is $12,300 with the later years the same.7Internal Revenue Service. Rev. Proc. 2026-15, Depreciation Deductions for Passenger Automobiles A $60,000 business vehicle can’t be fully written off in year one; the recovery stretches across six or more years. Vehicles over 6,000 pounds gross weight that aren’t designed primarily for passenger transport generally fall outside these caps and can be fully expensed.
How the Deduction Reaches the Member
The LLC computes total depreciation, then allocates each member’s share through the operating agreement. Each member gets a Schedule K-1 reporting their portion of income, deductions, and credits, including depreciation, and reports those numbers on their personal Form 1040.8Internal Revenue Service. Income – Schedules K-1 and Rental
Most LLCs allocate depreciation in proportion to each member’s percentage interest. Operating agreements can include special allocations that give a larger share of depreciation to specific members, but the IRS requires any such allocation to have “substantial economic effect,” meaning the tax benefit has to match a real economic arrangement rather than a paper shift to the highest-bracket member.9Office of the Law Revision Counsel. 26 U.S. Code 704 – Partners Distributive Share An allocation that fails the test can be rewritten by the IRS to match each member’s real economic interest.
A single-member LLC doesn’t file a partnership return. Depreciation goes directly on the Schedule C attached to the owner’s Form 1040; the math is the same, but there’s no allocation step and no K-1.10Internal Revenue Service. Instructions for Schedule C Form 1040
Three Limits That Can Block Your Deduction
This is where most LLC members get tripped up. Even after the entity calculates and allocates a depreciation deduction to you, three separate limitations can keep you from using it on your personal return. They apply in order, and failing any one suspends part or all of the deduction.
Tax Basis
You can’t deduct losses that exceed your outside tax basis in the LLC. Basis starts with what you invested (cash plus the adjusted basis of any contributed property), increases with your share of entity income, and decreases with distributions and your share of losses and deductions, including depreciation.11Office of the Law Revision Counsel. 26 U.S. Code 705 – Determination of Basis of Partners Interest If depreciation pushes your allocated losses above your remaining basis, the excess is suspended until future contributions or income allocations restore basis.
It also matters on exit. When you sell your interest, your gain is the sale price minus your adjusted basis. Every dollar of depreciation that reduced your basis along the way adds a dollar to your taxable gain. The benefit isn’t free; it’s deferred.
At-Risk
After basis, losses have to clear the at-risk hurdle. You can only deduct losses up to the amount you have at risk in the activity, which generally means cash contributed plus amounts you’ve personally borrowed and are liable to repay.12Office of the Law Revision Counsel. 26 U.S. Code 465 – Deductions Limited to Amount at Risk Nonrecourse debt, where you’re not personally on the hook, typically doesn’t count. Losses above your at-risk amount carry forward.
Passive Activity
This is the one that bites hardest for passive investors in LLCs. Passive activity losses can only offset passive activity income, not wages, salary, or portfolio income like dividends and interest.13Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited An activity is passive if you don’t materially participate, and limited partners are generally presumed not to materially participate.
For LLC members, material participation is tested year by year. The most straightforward test is logging more than 500 hours in the activity during the year. If you don’t meet any of the seven IRS participation tests, your share of depreciation-driven losses sits suspended until you generate passive income from another source or dispose of your entire interest in the activity.
Rental real estate gets a narrow carveout. If you actively participate in managing the rental (decisions about tenants, repairs, lease terms), you can deduct up to $25,000 of passive rental losses against non-passive income. That allowance phases out by 50 cents on the dollar once your adjusted gross income passes $100,000 and disappears entirely at $150,000 AGI. Limited partners generally don’t qualify as active participants at all.13Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited
Suspended passive losses aren’t lost. They release in full when you dispose of your entire interest in the activity in a taxable transaction. Members report passive activity limits on Form 8582.14Internal Revenue Service. About Form 8582, Passive Activity Loss Limitations
What Happens When the LLC Sells
Depreciation reduces basis, which increases gain on sale. The IRS doesn’t let all of that gain qualify as favorable long-term capital gain; the portion tied to prior depreciation gets recaptured at higher rates.
For depreciable personal property like equipment, vehicles, and machinery, gain is recaptured as ordinary income to the extent of all depreciation previously taken. If the LLC bought a $100,000 machine, claimed $100,000 of depreciation, and sold it for $40,000, the full $40,000 is ordinary income.15Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
Real property that was depreciated using the straight-line method, which is required for buildings under MACRS, gets better treatment. The depreciation-related portion of the gain, called unrecaptured Section 1250 gain, is taxed at a maximum federal rate of 25%; any gain above the total depreciation taken qualifies for the lower long-term capital gains rates.16Internal Revenue Service. Topic No. 409, Capital Gains and Losses Recapture flows through to members on the K-1, which breaks out the character of the gain so each member reports ordinary income and capital gain in the right amounts.
How Depreciation Affects the QBI Deduction
Depreciation hits the Section 199A qualified business income deduction two ways, and they pull in opposite directions. Depreciation reduces qualified business income, which shrinks the base for the 20% deduction.17Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income At the same time, for members whose taxable income exceeds the phase-in thresholds, the QBI deduction is limited to the greater of 50% of W-2 wages paid by the business, or 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property. Unadjusted basis is the original purchase price before any depreciation, and property counts toward the calculation for the longer of 10 years or the full MACRS recovery period.
For real estate LLCs, that creates a planning angle: the buildings generate depreciation that cuts current taxable income, while their unadjusted basis supports a larger QBI deduction for high-income members who would otherwise be squeezed by the wage test.
Forms and Records
Multi-member LLCs and limited partnerships file Form 1065, with Form 4562 attached to detail the basis, recovery period, method, and current-year deduction for every depreciable asset.18Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income Each member then receives a Schedule K-1 showing their allocated share.
Record-keeping for depreciable property runs longer than for ordinary expenses. The general three-year rule doesn’t apply here: depreciation records have to be kept until the statute of limitations closes for the year you dispose of the property.19Internal Revenue Service. How Long Should I Keep Records For a building on a 39-year recovery period, that means holding the original purchase documents, closing statements, and improvement records for over four decades. Losing the paperwork that establishes original basis can produce disallowed deductions on audit and makes defending the gain on sale nearly impossible.
Members have their own records to keep: capital contributions, distributions, and the cumulative share of income and losses for every year they’ve held the interest. The LLC won’t always track outside basis for you, and reconstructing it years later is one of the most expensive tax-preparation problems that owners of pass-through entities run into.