Depreciable value is the portion of a business asset’s cost that you’re allowed to recover through depreciation deductions over time. Under the Modified Accelerated Cost Recovery System (MACRS), which governs most federal tax depreciation, that amount equals your full adjusted cost basis because salvage value is treated as zero. Under the straight-line method used for certain property outside MACRS, and under financial accounting standards, it equals cost basis minus estimated salvage value. This number sets the ceiling on every depreciation deduction you’ll ever claim for the asset, so getting it right at the start matters more than almost any other depreciation decision you make.
The Two Formulas
Which formula applies depends on which system you’re using.
Under MACRS, salvage value is disregarded entirely, so depreciable value is simply your adjusted cost basis.1Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System Buy a piece of equipment for $50,000 and place it in service, and the full $50,000 is what you’ll recover through depreciation deductions.
Under the straight-line method used for certain property not covered by MACRS, including some intangible assets, you subtract estimated salvage value from adjusted basis. What’s left is the total you can depreciate over the asset’s useful life.2Internal Revenue Service. Publication 946 (2024), How To Depreciate Property A patent purchased for $5,100 with no salvage value would produce $300 in annual depreciation over a 17-year useful life.
The distinction trips up a lot of business owners. Textbooks teach the “cost minus salvage” formula, and that’s correct for financial statements prepared under generally accepted accounting principles. But for federal income tax purposes, MACRS covers the vast majority of tangible property, and MACRS ignores salvage value altogether. If you’re filing a tax return, you’re almost certainly using MACRS, and your depreciable value is your full cost basis.
What Goes Into Cost Basis
The basis of property is its cost.3Office of the Law Revision Counsel. 26 U.S. Code 1012 – Basis of Property – Cost That sounds simple, but “cost” covers more than the sticker price. Every dollar spent to acquire the asset and get it ready for use gets folded into the basis: the purchase price, sales tax, freight and delivery charges, installation fees, and testing costs. If you build the asset yourself, the basis includes materials, labor, and overhead costs like permits and legal fees tied to construction.
This number sets the upper boundary of what you can ever recover. Understate it and you leave deductions on the table. Overstate it and you invite an audit adjustment. Keep detailed records of every acquisition-related cost from the start, because reconstructing them years later is difficult and expensive.
Repairs vs. Improvements Later On
Money spent on an asset after it’s placed in service falls into one of two buckets: repairs, deductible immediately, or improvements, added to the basis and depreciated. The IRS applies three tests. An expenditure has to be capitalized if it:4Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions
- Betters the property by fixing a pre-existing defect, physically enlarging it, or materially increasing its capacity or output.
- Restores the property by replacing a major component, returning a non-functional asset to working order, or rebuilding it to like-new condition after the end of its class life.
- Adapts the property to a use different from what you originally intended when you placed it in service.
For buildings, these tests apply separately to the building structure and each major system: plumbing, electrical, HVAC, elevators, fire protection, gas distribution, and security. Replacing a few shingles on a warehouse roof is a repair. Replacing the entire roof is a restoration that gets capitalized and added to the building’s depreciable basis. The line between the two is where most disputes with the IRS happen, so document your reasoning.
What Actually Qualifies
Not everything you buy for the business has a depreciable value. Federal law allows depreciation for the wear, tear, and obsolescence of property used in a trade or business, or held for the production of income.5Office of the Law Revision Counsel. 26 U.S.C. 167 – Depreciation To qualify, property has to meet all of these conditions:
- You own the property. Leased equipment generally can’t be depreciated by the lessee, though there are exceptions for certain capital leases.
- The property is used in your trade or business or held to produce income. Purely personal-use items don’t qualify.
- The asset has a determinable useful life. It has to wear out, decay, get used up, or become obsolete over a period you can reasonably estimate.6Internal Revenue Service. Topic No. 704, Depreciation
- It’s expected to last more than one year. Supplies and materials consumed within a year are expensed, not depreciated.
Land is never depreciable. It doesn’t wear out and has no determinable useful life. When you buy real estate, you have to separate land value from building value and depreciate only the building. Buildings themselves, along with machinery, vehicles, furniture, computers, and intangible property like patents and copyrights, all qualify if they meet the conditions above.
Accelerating the Write-Off
Standard MACRS spreads deductions across the asset’s recovery period, but two provisions let you recover the depreciable value much faster, sometimes all in year one.
Section 179 Expensing
Section 179 lets you deduct the full cost of qualifying property in the year you place it in service, up to an annual dollar cap. The statutory base limit is $2,500,000, with a phase-out that begins when total qualifying property placed in service during the year exceeds $4,000,000.7Office of the Law Revision Counsel. 26 U.S.C. 179 – Election To Expense Certain Depreciable Business Assets Both thresholds adjust annually for inflation beginning in tax years after 2025. For 2026, the inflation-adjusted limit is approximately $2,560,000, with the phase-out beginning around $4,090,000.
Section 179 covers tangible personal property, off-the-shelf computer software, and certain real property improvements like roofs, HVAC systems, fire protection systems, and security systems for nonresidential buildings.8Internal Revenue Service. Instructions for Form 4562 (2025) One important limitation: the Section 179 deduction can’t exceed your taxable income from active business operations in that year. Any excess carries forward.
Bonus Depreciation
Bonus depreciation, formally the additional first-year depreciation deduction, allows an immediate write-off of a percentage of qualifying property’s cost on top of regular MACRS depreciation. Under the One, Big, Beautiful Bill Act signed in 2025, the bonus rate was restored to 100 percent for qualifying property acquired and placed in service after January 19, 2025.9Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill That effectively eliminates the phase-down schedule that had been reducing the rate each year since 2023.
Property acquired before January 20, 2025, and placed in service during 2026 still follows the original phase-down and qualifies for only 20 percent bonus depreciation. When you acquired the asset, not just when you placed it in service, determines the rate. Unlike Section 179, bonus depreciation has no dollar cap and no taxable income limitation, which makes it especially valuable for businesses making large capital investments.
What Happens When You Sell
Every dollar of depreciation you claim reduces the asset’s adjusted basis. Sell the asset for more than that reduced basis and the IRS wants some of the tax benefit back. This is depreciation recapture, and it’s the piece of the equation that surprises people who focused only on the deduction side.
Personal Property
When you sell depreciable personal property at a gain, the gain is taxed as ordinary income to the extent of all depreciation previously deducted or that should have been deducted.10Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property That includes regular MACRS deductions, Section 179 deductions, and bonus depreciation. Buy equipment for $100,000, claim $60,000 in total depreciation, and sell it for $85,000: your gain is $45,000, the sale price minus the $40,000 adjusted basis. The entire $45,000 is ordinary income because it sits within the $60,000 of depreciation claimed.
Any gain above total depreciation claimed would be taxed at capital gains rates. But for most equipment and vehicle sales, the sale price rarely exceeds the original purchase price, so the entire gain ends up as ordinary income.
Real Property
Buildings work differently. When you sell a depreciated building at a gain, the portion of the gain attributable to depreciation you claimed is taxed at a maximum rate of 25 percent, rather than at ordinary income rates.11Internal Revenue Service. Topic No. 409, Capital Gains and Losses Any remaining gain above the original cost basis is taxed at the applicable long-term capital gains rate. This more favorable treatment reflects the fact that real property has to use straight-line depreciation, which produces smaller annual deductions than the accelerated methods used for personal property.