Depreciation Methods for Tax Purposes: MACRS, Section 179, Bonus

For federal tax purposes, nearly all tangible business property is depreciated under the Modified Accelerated Cost Recovery System (MACRS), which assigns one of three calculation methods: 200% declining balance, 150% declining balance, or straight-line. Two additional tools sit on top of MACRS. Section 179 lets you expense qualifying property immediately, and bonus depreciation, restored to 100% by the One Big Beautiful Bill Act, lets you write off most of what’s left in year one. Together these are the depreciation methods for tax purposes you’ll actually work with, and choosing among them comes down to what the property is, when you placed it in service, and how much of the cost you want to deduct now versus later.

What Property You Can Depreciate

An asset qualifies for depreciation only if it meets all four tests: you own it, you use it in a business or income-producing activity, it has a determinable useful life, and it will last longer than one year.¹ Land doesn’t qualify because it doesn’t wear out. Inventory doesn’t qualify because it’s held for sale. Personal-use property is out.

Intangibles like patents, copyrights, and goodwill are handled through amortization, not depreciation, and follow separate rules. Everything below is about tangible property: equipment, vehicles, furniture, buildings, and land improvements.

Your depreciable basis is generally the purchase price plus sales tax, delivery, and installation. If the property is used partly for personal purposes, only the business-use percentage counts. Unlike older depreciation systems, MACRS does not subtract salvage value.² You depreciate the full basis.

Depreciation begins on the date the asset is “placed in service,” meaning ready and available for its intended use. Equipment sitting in the crate hasn’t been placed in service. The moment it’s installed and operational, the clock starts, whether you use it that day or not.

The Three MACRS Methods

Under the General Depreciation System (the standard MACRS track), the IRS assigns a calculation method to each property class. You can elect a slower method than the one assigned. You cannot elect a faster one.

200% Declining Balance

This is the most front-loaded method. It doubles the straight-line rate and applies that rate to the remaining book value each year. A 5-year asset has a 20% straight-line rate, so 200% declining balance uses 40% applied to the undepreciated balance. MACRS automatically switches to straight-line in whichever year that produces the larger deduction. This method applies to 3-year, 5-year, 7-year, and 10-year property.³

150% Declining Balance

Moderately accelerated. It uses 1.5 times the straight-line rate, follows the same declining-balance logic, and switches to straight-line the same way. It’s assigned to 15-year and 20-year property.³

Straight-Line

Divide the depreciable basis evenly across the recovery period. A $390,000 commercial building depreciates at $10,000 a year over 39 years, adjusted for the mid-month convention in the first and last years. Straight-line is mandatory for all real property (27.5-year residential and 39-year nonresidential) and can be voluntarily elected for any other class.³ One catch: if you elect straight-line for a property class, you have to apply it to every asset in that class placed in service during the year, and the election is irrevocable.

Recovery Periods and Conventions

Every method needs two inputs to produce a number: the recovery period (how many years) and the convention (how much you get in the first and last years).

Property Classes

3-year property: certain manufacturing tools, tractors, and racehorses over two years old.
5-year property: cars, light trucks, computers, office equipment, and appliances in rental property.
7-year property: office furniture and most machinery not assigned to another class.
15-year property: land improvements (parking lots, fences, sidewalks, landscaping) and qualified improvement property.
20-year property: farm buildings and certain municipal infrastructure.
27.5-year property: residential rental buildings.
39-year property: nonresidential real property like offices, retail, and warehouses.

You don’t estimate useful life. The statute has already made the call.

Conventions

The half-year convention is the default for personal property. Every asset is treated as placed in service at midyear, so you get half a year’s depreciation in year one and half in the final year.

The mid-quarter convention kicks in when more than 40% of the year’s total depreciable basis of personal property is placed in service in the last three months. When triggered, it applies to every asset placed in service that year, treating each as placed in service at the midpoint of its quarter.⁴

The mid-month convention applies only to real property. A building placed in service on January 3 gets 11.5 months of depreciation that year.

The Alternative Depreciation System

ADS is a separate MACRS track that uses straight-line exclusively and generally assigns longer recovery periods: 40 years for nonresidential real property (versus 39 under GDS), 30 years for residential rental (versus 27.5), and 12 years for personal property with no assigned class life.³

ADS is mandatory for property used predominantly outside the United States, tax-exempt use property, and property financed with tax-exempt bonds. It’s also required for computing earnings and profits.

You can voluntarily elect ADS for any property class even when it isn’t required. The usual reason: you’re in a low-income year and would rather save bigger deductions for later. The election applies to every asset in the chosen class placed in service that year and cannot be reversed.

Section 179 Expensing

Section 179 lets you deduct the full cost of qualifying property in the year you place it in service instead of spreading it over the MACRS period. For 2026, the maximum Section 179 deduction is approximately $2.56 million, up from $2.5 million in 2025. Both figures are indexed for inflation.

Qualifying property includes tangible personal property (equipment, machinery, vehicles), off-the-shelf software, and certain nonresidential real property improvements: qualified improvement property, plus roofs, HVAC, fire protection and alarm systems, and security systems added after the building was originally placed in service.²

Two limitations can shrink or eliminate the deduction. The investment ceiling phases the deduction out dollar-for-dollar once total qualifying property placed in service during the year exceeds roughly $4.09 million for 2026, and it disappears entirely once purchases exceed about $6.65 million. The taxable income limit caps your Section 179 deduction at your total taxable income from all active trades or businesses. A business with a net loss gets no Section 179 that year, but any amount blocked by the income limit carries forward indefinitely.⁵

Bonus Depreciation at 100%

Bonus depreciation was in the middle of a phase-out when Congress reversed course. Under the Tax Cuts and Jobs Act schedule, the bonus percentage was set to fall from 80% in 2023 to 60% in 2024, 40% in 2025, 20% in 2026, and zero after that. The One Big Beautiful Bill Act, signed on July 4, 2025, scrapped that phase-out and permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025.⁶

Qualified property includes assets with a MACRS recovery period of 20 years or less, certain computer software, water utility property, and qualified improvement property. Both new and used assets qualify, though used property must not have been previously used by you and must meet specific acquisition requirements. There is no investment cap. There is no taxable income limit.⁶

The old phase-down percentages still matter for one group: property acquired before January 20, 2025 but placed in service later. Equipment purchased in November 2024 and placed in service in 2026 gets only 20% bonus depreciation under the old schedule.

How the Three Layer Together

The tools apply in a specific order, and the order matters when a Section 179 limit is binding or when you want to split a deduction across years.

First, apply Section 179 to as much of the asset’s cost as its limits allow. Second, apply bonus depreciation to whatever cost remains. Third, calculate regular MACRS on any residual basis. For most qualifying personal property placed in service in 2026, that stack lets you deduct the entire cost in year one. Regular MACRS by itself only comes into play for property that doesn’t qualify for either accelerator, or when you elect out.

Electing out of bonus depreciation is sometimes worth doing. If income is low this year but expected to climb, preserving basis for future MACRS deductions at higher marginal rates can produce more total tax savings. The election is made class by class, so you can keep bonus depreciation on 5-year property while opting out on 7-year property.

Vehicle and Listed Property Limits

Certain assets the IRS calls “listed property” face an extra requirement: you must use them more than 50% for business to claim accelerated depreciation, Section 179, or bonus depreciation. At 50% or below, you’re restricted to straight-line depreciation over the ADS recovery period.² Vehicles are the most common listed property.

If business use drops to 50% or below in a later year after you’ve claimed accelerated depreciation, you have to recapture the excess. That means adding back to income the difference between what you actually deducted and what straight-line ADS would have given you from the start.²

Passenger vehicles face annual dollar caps on depreciation no matter which method you use. For vehicles placed in service in 2026 where 100% bonus depreciation applies, the first-year cap is $20,300. Without bonus, the first-year limit drops to $12,300. Later years are capped at $19,800 (year two), $11,900 (year three), and $7,160 for each year after that until basis is fully recovered.⁷ A $60,000 business car takes many years to fully depreciate even with bonus available.

Heavy SUVs and trucks with a gross vehicle weight rating above 6,000 pounds are exempt from the passenger vehicle caps, though Section 179 imposes its own limit on heavy SUVs, typically around $30,500 and indexed annually.

Recapture When You Sell

Depreciation deductions come back in part when you sell the asset. The rules split by property type.

For depreciable personal property (equipment, vehicles), Section 1245 taxes the portion of your gain attributable to prior depreciation as ordinary income, not at capital gains rates. Section 179 and bonus depreciation are treated the same as regular depreciation for this purpose.⁸ Buy equipment for $100,000, claim $100,000 in bonus depreciation, sell three years later for $45,000, and the full $45,000 gain is ordinary income taxed at your marginal rate.

Real property gets gentler treatment. When you sell depreciable real property at a gain, the depreciation portion is taxed at a maximum rate of 25%, and any gain above prior depreciation is taxed at long-term capital gains rates (typically 15% or 20%).⁹

One trap worth flagging: recapture applies to depreciation “allowed or allowable,” meaning the larger of what you actually deducted or what you could have deducted.⁸ Skipping deductions you were entitled to doesn’t reduce future recapture. If you can take the depreciation, take it.

Reporting on Form 4562

You claim depreciation and immediate expensing on Form 4562. Filing is required any year you place new depreciable property in service, claim Section 179, or report depreciation on listed property.¹⁰

The form mirrors the layered approach. Part I handles Section 179, including the total cost of qualifying property, the investment ceiling, and the final deduction. Part II is bonus depreciation (the “special depreciation allowance”). Parts III through V cover regular MACRS depreciation for current-year and prior-year property, separated by GDS and ADS. Part VI is listed property, where you document business-use percentages and confirm you meet the 50% threshold.

Totals flow from Form 4562 to your business return: Schedule C for sole proprietors, Form 1065 for partnerships, or Form 1120 or 1120-S for corporations.¹¹

Keep records for as long as you own the asset plus three years after the return on which you claim the final depreciation deduction or report the sale. That means purchase invoices, placed-in-service documentation, business-use logs for listed property, and the annual depreciation calculations themselves. Gaps in documentation are where depreciation deductions get disallowed on audit.

1
Internal Revenue Service. Topic No. 704, Depreciation
2
Internal Revenue Service. Publication 946 – How To Depreciate Property
3
Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
4
eCFR. 26 CFR 1.168(d)-1 – Half-Year and Mid-Quarter Conventions
5
eCFR. 26 CFR 1.179-3 – Carryover of Disallowed Deduction
6
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
7
Internal Revenue Service. Rev. Proc. 2026-15
8
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
9
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
10
Internal Revenue Service. About Form 4562, Depreciation and Amortization
11
Internal Revenue Service. Instructions for Form 4562