What Are Depreciable Assets? MACRS, Section 179, and Recapture

A depreciable asset is property your business owns that loses value over time and lasts longer than one year, and the IRS lets you deduct its cost gradually rather than all at once. That covers equipment, vehicles, buildings, rental property, and even certain intangibles like patents and goodwill. Classifying an asset correctly controls how much you can deduct each year, which method and forms apply, and what the tax bill looks like when you eventually sell.

The Four-Part Test

Four conditions have to be satisfied before any deduction is available. You must own the property. It must be used in your business or another income-producing activity. It must have a useful life you can estimate. And that useful life must extend substantially beyond the current tax year.¹ The authority for the deduction sits in Section 167 of the Internal Revenue Code, which covers the gradual loss of value from use and obsolescence.²

Ownership is a real limitation. Equipment you lease from someone else is a rental expense, not something you can depreciate. The income-producing prong is broader than the phrase sounds: a rental property held purely as an investment qualifies even though you aren’t running a trade around it.

The useful-life piece is what separates a depreciable asset from an ordinary expense. Printer paper gets used up in weeks, so it’s a current expense. A commercial printer that will run for seven years is a depreciable asset. If a thing wears out, decays, or becomes obsolete over more than a year, it generally qualifies.³

Tangible Property: MACRS Classes

Physical business assets run through the Modified Accelerated Cost Recovery System, or MACRS, established in Section 168. MACRS assigns each type of asset to a class based on how long the IRS expects it to remain useful, running from 3 years for certain short-lived equipment to 39 years for commercial buildings.⁴

Most business personal property falls into one of two classes. Five-year property covers cars, light trucks, copiers and other office machines, research equipment, computers, and certain renewable energy property. Seven-year property covers office furniture and fixtures like desks, filing cabinets, and safes, and it also catches anything without an assigned class life.³

Real property runs on longer timelines. Residential rental buildings recover over 27.5 years. Nonresidential real property, meaning offices, warehouses, and retail space, uses 39 years.⁴ Only the building is depreciable. Land is a separate, non-depreciable asset, so when you buy commercial real estate you have to allocate the purchase price between the two. Building improvements like a new roof or upgraded wiring create their own depreciable basis on their own recovery period.

Which Method Applies

MACRS offers two systems. The General Depreciation System (GDS) is the default and gives most businesses three method choices. The Alternative Depreciation System (ADS) uses longer recovery periods and straight-line only, and it’s mandatory in a handful of situations, most commonly for property used predominantly outside the United States.³

Under GDS, the 200% declining balance method is standard for personal property in the 3-, 5-, 7-, and 10-year classes. It front-loads your deductions, giving larger write-offs in the early years, then switches to straight-line automatically when that produces a bigger deduction. The 150% declining balance method is required for 15- and 20-year property. Straight-line spreads the deduction evenly across the recovery period; it’s required for all real property and available by election for any class.

Intangible Property and Software

Assets don’t have to be physical. Section 197 covers intangibles like patents, trademarks, copyrights, franchises, and goodwill acquired as part of a business. You recover the cost through amortization, which is depreciation for non-physical property, over 15 years on a straight-line basis starting the month you acquire the intangible.⁵

Software is a common source of confusion because two different rules can apply. Off-the-shelf software bought separately for business use is depreciated over 36 months, straight-line, under Section 167(f).⁶ Software you acquire bundled into the purchase of a business, alongside goodwill and other intangibles, gets folded into the 15-year Section 197 schedule.

What Cannot Be Depreciated

Land is the biggest exception. It doesn’t wear out or become obsolete, so the IRS treats it as permanent. Costs that make land usable, like clearing, grading, and basic landscaping, get added to the land’s cost basis rather than depreciated on their own.³

Inventory held for sale is also out. Those items flow through cost of goods sold, not depreciation.³ And personal-use property, meaning a home or a car you never use for work, is ineligible because it isn’t connected to an income-producing activity.

When Depreciation Actually Starts

Depreciation begins when you place an asset in service, not when you write the check. Placed in service means installed, set up, and ready for its intended use. Buy a piece of manufacturing equipment in November that sits on the loading dock until January while you wait on installation, and depreciation starts in January.⁷ A rental property is placed in service when it’s available for tenants, even if it sits vacant a while.

Depreciation ends when you have fully recovered the asset’s cost or when the asset leaves service through sale, trade, abandonment, or destruction, whichever comes first.¹

MACRS uses conventions to avoid day-level math. The default is the half-year convention, which treats every asset placed in service during the year as if it were placed in service at the midpoint. Your first-year deduction is half a full year regardless of the actual month. However, if more than 40% of your total depreciable property for the year was placed in service in the last three months, the mid-quarter convention takes over. Each asset is then treated as placed in service at the midpoint of the quarter it actually arrived, which stops businesses from buying everything in December and claiming a half-year of deductions on a few weeks of use.⁸

Faster Write-Offs: Section 179 and Bonus Depreciation

Spreading a deduction over five or seven years isn’t always necessary. Two provisions let you write off qualifying property much sooner, and they can be combined.

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 a dollar cap. For tax years beginning in 2026, the maximum deduction is $1,250,000, and that ceiling begins to phase out dollar-for-dollar once total qualifying property placed in service during the year exceeds $3,130,000.⁹ There’s also a business income cap: the Section 179 deduction cannot exceed taxable income from the active conduct of your business, though any excess carries forward.¹⁰

Bonus Depreciation

Bonus depreciation, formally the additional first-year depreciation allowance, works differently. Under the One, Big, Beautiful Bill, qualified property acquired after January 19, 2025, is eligible for 100% bonus depreciation, meaning the entire cost can be written off in year one with no dollar limit.¹¹ Unlike Section 179, bonus depreciation has no business income cap, so it can create or increase a net operating loss.

The two often work together. A common sequence is to apply Section 179 first, especially for assets subject to dollar caps, and then claim bonus depreciation on the rest. Section 179 is an election you make asset by asset. Bonus depreciation applies automatically to all qualifying property unless you elect out.

Vehicle Depreciation Caps

Passenger vehicles get their own scrutiny. Section 280F caps annual depreciation on cars and light trucks no matter what they cost. For vehicles placed in service during 2026 where bonus depreciation applies, the first-year limit is $20,300. Without bonus depreciation, that first-year limit is $12,300.¹² Later-year caps are the same either way: $19,800 in year two, $11,900 in year three, and $7,160 each year after until the cost is recovered. The math means an expensive car can take well over a decade to fully depreciate, which catches owners off guard when they expect the same first-year treatment as manufacturing equipment.

Section 179 has its own vehicle cap. For sport utility vehicles, the Section 179 deduction is capped at $32,000 for 2026, regardless of the vehicle’s total cost.⁹

Property Used Partly for Personal Reasons

When an asset is used partly for business and partly for personal purposes, only the business-use portion is depreciable. You multiply the cost by the business-use percentage to get the depreciable basis.¹³ A laptop used 70% for work and 30% for personal browsing gets only 70% of its cost into the calculation.

Certain items called “listed property,” including vehicles, qualify for accelerated depreciation only if business use is more than 50%. Fall below that threshold and you have to switch to the ADS straight-line method. If business use drops below 50% in a later year after you already claimed accelerated depreciation, you have to recapture the difference as ordinary income that year. Contemporaneous logs of business versus personal use are what the IRS expects to see for listed property in an audit.³

If you convert a personal asset to business use, the depreciable basis is the lesser of the property’s fair market value on the date of conversion or your original adjusted cost. That prevents depreciating losses that occurred while the property was personal.

What Happens When You Sell: Recapture

Depreciation reduces your basis in the asset. When you later sell for more than that reduced basis, the IRS recaptures some or all of the prior deductions by taxing part of the gain as ordinary income rather than at the lower capital gains rate. Recapture applies whether or not you actually claimed the deductions you were entitled to.

For depreciable personal business property under Section 1245 (equipment, vehicles, and similar), gain is taxed as ordinary income up to the total depreciation claimed. Only gain beyond that amount is capital gain.¹⁴ Buy a truck for $10,000, claim $6,160 in depreciation, sell for $7,000: the $3,160 gain is entirely ordinary because it falls within the depreciation already taken.

Buildings follow a different rule under Section 1250. Because real property depreciates on the straight-line method, the gain attributable to prior depreciation is classified as “unrecaptured Section 1250 gain” and taxed at a maximum rate of 25%, higher than typical long-term capital gains but lower than ordinary income rates. Gain above the depreciation taken is taxed at regular capital gains rates.¹⁵ A building depreciated for 15 years can produce a surprisingly large tax bill on sale if this layer wasn’t planned for.

Reporting and Records

Depreciation and amortization deductions go on Form 4562, which is also where you make the Section 179 election and report business use of vehicles and other listed property.¹⁶ Sole proprietors attach it to Schedule C; partnerships and corporations file it with their returns.

For each depreciable asset, keep records of the acquisition date, cost or other basis, date placed in service, recovery period and method, and business-use percentage. Listed property records need to be contemporaneous, showing each business use with date, purpose, and mileage or time. Reconstructing them at tax time is not what the IRS asks for.³

One last thing that trips people up: state income tax treatment of depreciation often differs from federal. Not every state conforms to federal bonus depreciation or Section 179 limits, which can mean adding back part of a federal deduction on the state return and recovering it over a longer period. Checking your state’s conformity rules before filing is what keeps the state bill from arriving as a surprise.

1
Internal Revenue Service. Topic No. 704, Depreciation
2
Office of the Law Revision Counsel. 26 USC 167 – Depreciation
3
Internal Revenue Service. Publication 946, 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 197 – Amortization of Goodwill and Certain Other Intangibles
6
Legal Information Institute. 26 USC 167(f)(1) – Computer Software
7
Internal Revenue Service. Depreciation Reminders
8
eCFR. 26 CFR 1.168(d)-1 – Applicable Conventions, Half-Year and Mid-Quarter Conventions
9
Internal Revenue Service. Inflation-Adjusted Items for 2026 (Rev. Proc. 2025-32)
10
eCFR. 26 CFR 1.179-2 – Limitations on Amount Subject to Section 179 Election
11
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
12
Internal Revenue Service. Rev. Proc. 2026-15 – Depreciation Limitations for Passenger Automobiles
13
Internal Revenue Service. Instructions for Form 4562, Depreciation and Amortization
14
Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets
15
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
16
Internal Revenue Service. About Form 4562, Depreciation and Amortization