Business equipment that lasts longer than a year generally has to be capitalized and deducted over time, but federal law gives you two ways to accelerate that recovery: Section 179 expensing (up to $2,560,000 for tax years beginning in 2026) and 100% bonus depreciation, which the One Big Beautiful Bill Act permanently restored for property placed in service after January 19, 2025. Anything you don’t write off through those provisions is depreciated under the Modified Accelerated Cost Recovery System over a recovery period of three to twenty years depending on the asset. The capital equipment depreciation tax rules below walk through how each method works, how they stack, and where the limits sit.
What Counts as Capital Equipment
An asset is capital equipment when it meets three conditions: useful life longer than one year, used in producing income or running the business, and not held for resale as inventory.1Internal Revenue Service. Topic No. 704, Depreciation Manufacturing machinery, commercial vehicles, servers, production tooling, and office furniture are typical examples. Printer paper, cleaning supplies, and fuel are ordinary expenses you deduct right away.
Repairs versus improvements is the other line. Replacing worn brake pads on a delivery truck is a deductible repair. Rebuilding the engine so the truck runs another five years is a capital expenditure recovered through depreciation.2Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions
The De Minimis Safe Harbor
Not every long-lived purchase needs a depreciation schedule. The IRS de minimis safe harbor lets a business with an applicable financial statement (typically audited) expense items costing up to $5,000 each, and lets a business without one expense items up to $2,500 each.3Internal Revenue Service. IRS Notice 2015-82 – Increase in De Minimis Safe Harbor Limit You elect annually by attaching a statement to your return, and the limit applies per invoice or per item. It’s genuinely useful for tablets, small tools, and inexpensive monitors that technically last more than a year but aren’t worth tracking.
Section 179 Expensing
Section 179 lets you deduct the entire cost of qualifying equipment in the year you place it in service. For tax years beginning in 2026, the maximum deduction is $2,560,000. It phases out dollar-for-dollar once Section 179-eligible purchases for the year exceed $4,090,000, which effectively targets small and mid-size businesses.4Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets Both limits are indexed for inflation annually.
Qualifying property includes tangible personal property subject to MACRS, off-the-shelf software, and, at the taxpayer’s election, certain improvements to nonresidential buildings such as roofs, HVAC, fire protection, and security systems.5Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets The property has to be used in the active conduct of your business. Equipment acquired from a related party or converted from personal use generally doesn’t qualify.
The income cap is what separates Section 179 from bonus depreciation. Your deduction cannot exceed the taxable income from your active business operations for the year, so Section 179 cannot create or increase a net operating loss.1Internal Revenue Service. Topic No. 704, Depreciation Anything disallowed carries forward indefinitely to future years.6Internal Revenue Service. Form 4562 – Depreciation and Amortization A down year doesn’t lose the deduction; it just shifts it.
100% Bonus Depreciation After the OBBBA
Bonus depreciation under Section 168(k) is a first-year deduction for a percentage of qualifying property’s cost, with no dollar cap and no taxable income limitation. Under the original Tax Cuts and Jobs Act, 100% bonus depreciation ran through 2022 and then phased down: 80% in 2023, 60% in 2024, and 40% in 2025.
The One Big Beautiful Bill Act ended that phase-down. It permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025, with no sunset.7Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill For 2026 and beyond, qualifying equipment is fully deductible in year one.
Bonus depreciation applies to new and used property, as long as you haven’t used the specific asset before. A used forklift purchased from another company qualifies; a forklift you already owned and moved between divisions does not. Because bonus has no income cap, it can create or increase a net operating loss, which then carries forward.
Electing Out
A business expecting much higher income later, or one that wants smoother deductions, can elect out of bonus depreciation under Section 168(k)(7). The election applies to an entire class of property placed in service that year, not to individual assets within a class, and it’s generally irrevocable. Run the numbers before you file.
How the Two Accelerated Deductions Stack
On a single qualifying purchase you apply the deductions in order. First, allocate as much of the cost as you want to Section 179, up to the annual limit and your taxable income. Second, apply bonus depreciation (currently 100%) to whatever remains. Third, depreciate any leftover basis under MACRS. Everything is reported on Form 4562.6Internal Revenue Service. Form 4562 – Depreciation and Amortization
With 100% bonus back, the two provisions produce essentially the same result for a business with plenty of taxable income: a full first-year write-off. Section 179 is more useful when you want to pick which specific assets get expensed (bonus applies to an entire class) or when you want carryforward for deductions your current income can’t absorb.
MACRS for Everything Else
When you don’t (or can’t) write equipment off immediately, MACRS is the required federal method. Every depreciable asset is assigned to a property class with a fixed recovery period, and you deduct a portion each year.1Internal Revenue Service. Topic No. 704, Depreciation The common business classes:
- 5-year property: automobiles, trucks, computers, copiers, general-purpose office machinery.
- 7-year property: office furniture and fixtures such as desks, filing cabinets, and safes. Also any asset without a designated class life.
- 10-year property: single-purpose agricultural structures, fruit-bearing trees and vines.
- 15-year property: qualified improvement property and certain utility distribution equipment.
Class assignments come from the asset’s class life in the tax code.8Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System Publication 946 has detailed tables cross-referencing specific asset types to their recovery periods.9Internal Revenue Service. Publication 946 – How To Depreciate Property
Conventions and Capitalized Cost
MACRS doesn’t assume a January 1 in-service date. Most personal property uses the half-year convention, which treats every asset as placed in service at the midpoint of the tax year: half a year’s depreciation in both the first and last year. If more than 40% of your total asset purchases happen in the last quarter, the mid-quarter convention kicks in instead, which can noticeably reduce first-year deductions on those late purchases.
Your capitalized cost for MACRS includes everything needed to get the asset operational: purchase price, sales tax, shipping, installation, and any initial testing or configuration.10Internal Revenue Service. Topic No. 703, Basis of Assets
Vehicles and Other Listed Property
Some categories get extra scrutiny because they’re commonly used personally as well. Listed property, which includes passenger automobiles, other transportation equipment, and property used for entertainment or recreation, must be used more than 50% for business each year to qualify for Section 179 or accelerated MACRS. Drop below 50% and you’re limited to straight-line depreciation under the Alternative Depreciation System.
Passenger vehicles also face annual dollar caps regardless of cost or method. For vehicles placed in service in 2026 where bonus depreciation applies:
- Year 1: $20,300
- Year 2: $19,800
- Year 3: $11,900
- Year 4 and after: $7,160 per year until fully depreciated
Without bonus, the first-year cap drops to $12,300. These limits apply no matter what the car cost, so a $60,000 sedan takes several years to fully depreciate even though a $60,000 piece of manufacturing equipment can be written off entirely in year one. Heavy SUVs and trucks with a gross vehicle weight rating above 6,000 pounds are exempt from the passenger caps, though SUVs have a separate Section 179 limit ($31,300 for 2025, indexed annually).11Internal Revenue Service. Instructions for Form 4562 (2025)
When You Sell or Scrap the Equipment
Gain or loss on a sale is the sale price minus adjusted basis, which is what you originally capitalized less all depreciation claimed.10Internal Revenue Service. Topic No. 703, Basis of Assets A $100,000 machine written off entirely under Section 179 has a basis of zero, so a later sale for $25,000 produces $25,000 of gain. Worth thinking about before you take aggressive first-year deductions on equipment you might resell for real money.
That gain is subject to depreciation recapture under Section 1245. The portion representing previously claimed depreciation is taxed as ordinary income, not at capital gains rates.12Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property Only gain above your total depreciation qualifies as a Section 1231 gain, which can get long-term capital gains treatment if your Section 1231 gains exceed your Section 1231 losses for the year.13Office of the Law Revision Counsel. 26 U.S. Code 1231 – Property Used in the Trade or Business and Involuntary Conversions In practice, equipment rarely sells for more than original cost, so most gain on equipment sales is ordinary income from recapture.
When equipment is junked or abandoned instead of sold, you remove it from your books and recognize a loss equal to any remaining adjusted basis. Fully depreciated assets produce no tax impact when retired.
State Rules Often Don’t Match Federal
Federal and state depreciation rules diverge more than most businesses expect. More than 30 states have some form of modification to federal bonus depreciation, ranging from complete add-backs to partial caps per asset or property class, with fewer than half fully conforming. State Section 179 treatment varies too; some follow federal limits, others impose lower caps. In a multi-state business, the interaction between federal accelerated deductions and state add-backs can make your effective first-year deduction meaningfully lower than the federal amount. This catches businesses off guard after they claim aggressive federal write-offs.
Records You Need to Keep
Depreciation records have to be maintained as long as they matter for calculating depreciation and any eventual gain or loss on disposition, which means through the statute of limitations for the year you dispose of the asset.14Internal Revenue Service. How Long Should I Keep Records? The standard period is three years from when you filed the return, extending to six years if you underreported income by more than 25%.
For each capital asset, keep the purchase date, capitalized cost (including freight and installation), placed-in-service date, method and recovery period, any Section 179 or bonus depreciation claimed, and the date and terms of any eventual sale or retirement. A fixed-asset register that holds all of this in one place saves considerable time if the IRS ever questions your deductions.