How Accelerated Depreciation Works: MACRS, Section 179, and OBBBA Bonus

Accelerated depreciation works by letting a business deduct a larger share of an asset’s cost in its first few years of use instead of spreading it evenly across the asset’s life. The total write-off is the same either way. The timing is what changes, and the timing is where the tax benefit lives. For property placed in service in 2026, the combination of the Modified Accelerated Cost Recovery System (MACRS), 100% bonus depreciation restored by the One Big Beautiful Bill Act, and a Section 179 expensing limit of roughly $2.56 million means many businesses can write off the entire cost of qualifying equipment in the year they put it to work.¹

What Makes Depreciation “Accelerated”

MACRS is the default depreciation system for federal tax purposes and has been since 1987. It applies to most tangible property unless the business specifically elects the Alternative Depreciation System.² MACRS is not one formula. It assigns each asset a recovery period (the number of years over which the cost is written off) and a depreciation method (the rate at which deductions come off each year).

For property in the 3-year, 5-year, 7-year, and 10-year classes, MACRS uses the 200% declining balance method. That rate is double what straight-line depreciation would produce, which is the source of the “accelerated” label. Each year the deduction is calculated against the asset’s remaining basis, so early-year deductions are large and later-year deductions shrink. The system automatically switches to straight-line in whichever year the straight-line calculation would yield a bigger deduction, so the full cost is recovered by the end of the recovery period. Property in the 15-year and 20-year classes uses the somewhat less aggressive 150% declining balance method.³

MACRS also uses conventions to fix when the depreciation clock starts. The most common is the half-year convention: every asset placed in service during the year is treated as if it went into use at the midpoint, giving half a year’s depreciation in year one and half in the final year. An anti-abuse rule swaps in the mid-quarter convention if more than 40% of the year’s depreciable property is placed in service in the last three months. Real property uses the mid-month convention.³

Which Assets Qualify and for How Long

To be depreciable at all, property must be tangible, used in a trade or business or held to produce income, and have a useful life of more than a year. Land never qualifies because it does not wear out. Inventory does not qualify either, because its cost is recovered through cost of goods sold. Intangible assets like patents and goodwill are amortized under separate rules. Anything placed in service and disposed of in the same year gets no depreciation.

Qualifying assets are assigned to property classes with fixed recovery periods:²

3-year property: certain short-lived assets like tractor units and specialized tools.
5-year property: computers, automobiles, copiers, and research equipment.
7-year property: office furniture, fixtures, and most general-purpose machinery.
10-year property: certain vessels, barges, and single-purpose agricultural structures.
15-year property: land improvements such as fencing, sidewalks, and roads.
20-year property: farm buildings and certain municipal infrastructure.
27.5-year property: residential rental buildings, depreciated using straight-line.⁴
39-year property: nonresidential commercial real property, also straight-line.

These recovery periods are generally shorter than an asset’s real physical life. That gap is deliberate federal policy to encourage capital spending. Notice that the two real property classes at the bottom use straight-line, not an accelerated method. Buildings do not get accelerated treatment. Equipment, vehicles, and land improvements do.

Section 179: Expensing Up to a Dollar Cap

Section 179 lets a business deduct the full cost of qualifying property in the year it is placed in service, up to an annual dollar cap.⁵ The One Big Beautiful Bill Act, signed in July 2025, raised the base statutory limit from $1 million to $2.5 million and the investment phase-out threshold from $2.5 million to $4 million, effective for property placed in service after December 31, 2024. Both amounts are indexed for inflation. For 2025, the limits are $2,500,000 and $4,000,000. For 2026, inflation adjustments push the deduction limit to approximately $2,560,000 and the phase-out to roughly $4,090,000.¹

The phase-out is dollar for dollar. Once the total cost of qualifying property you place in service during the year exceeds the threshold, your maximum deduction drops by one dollar for every dollar over. Large enough purchases can eliminate the deduction entirely.

Qualifying property includes machinery, equipment, and off-the-shelf computer software. It also covers certain improvements to nonresidential real property: roofs, HVAC systems, fire protection and alarm systems, and security systems.³

One limitation trips up many owners. The Section 179 deduction cannot exceed your aggregate taxable income from the active conduct of a trade or business. Section 179 cannot create or increase a net operating loss. If the deduction would exceed that income, the excess carries forward to future years.⁶ For partnerships and S corporations, the limit applies at both the entity level and the individual owner level.

Bonus Depreciation Under the OBBBA

Bonus depreciation is the other way to front-load deductions, and its 2025 change was dramatic. Under the Tax Cuts and Jobs Act, 100% bonus depreciation had been phasing down: 80% in 2023, 60% in 2024, and just 40% scheduled for 2025. The One Big Beautiful Bill Act reversed the phase-out and permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.⁷ Eligible property includes tangible MACRS property with a recovery period of 20 years or less, off-the-shelf computer software, and qualified improvement property.

There is an acquisition-date wrinkle. The 100% rate applies only to property acquired after January 19, 2025. Equipment contracted for before that date but not placed in service until 2026 still falls under the old phase-down schedule, which means only 20% bonus depreciation for 2026. The acquisition date, not just the placed-in-service date, controls the rate.

Unlike Section 179, bonus depreciation has no annual dollar cap and no taxable-income limit. It can create or deepen a net operating loss, which then carries forward. That flexibility makes it the more powerful tool for large purchases. Section 179 remains useful when a business wants precise control over how much it expenses in a given year.

How the Two Stack on a Purchase

When a business buys qualifying property, the tax code applies these incentives in a set order. First, the business decides how much Section 179 expensing to elect, subject to the dollar cap and the taxable-income limit. Next, bonus depreciation applies to any remaining basis at the applicable percentage. Whatever basis is still left enters the standard MACRS schedule and is depreciated over the recovery period.

Take a business buying $300,000 of qualifying equipment in 2026. It could elect $300,000 of Section 179 and be done. It could skip Section 179 entirely and let 100% bonus depreciation handle the full cost. For most purchases the two routes produce the same first-year deduction. The difference shows up when taxable income is tight: Section 179 is capped at that income, bonus depreciation is not.

One structural difference matters for planning. The election to take or skip bonus depreciation is made on a class-by-class basis, meaning all 5-year property, all 7-year property, and so on. Section 179 can be applied selectively to individual assets. A business that wants to fine-tune its taxable income for the year will often use Section 179 for that reason.

Vehicles and Other Listed Property

Assets prone to personal use — called listed property — face extra restrictions that override the general rules. To claim accelerated depreciation, Section 179 expensing, or bonus depreciation on listed property, business use must exceed 50% during the year it is placed in service. Commuting and personal trips do not count as business use.³

If business use is 50% or less, accelerated methods are off the table and you must use straight-line over the longer ADS recovery period. If business use starts above 50% and later drops to 50% or less, you have to recapture the excess depreciation you claimed and report it as ordinary income on Form 4797.

Passenger vehicles have their own hard dollar caps under Section 280F, even when they qualify for accelerated treatment. For vehicles placed in service in 2026 where bonus depreciation applies:⁸

Year 1: $20,300
Year 2: $19,800
Year 3: $11,900
Each succeeding year: $7,160

Without bonus depreciation, the first-year cap drops to $12,300. These caps apply per vehicle, so a $60,000 car will take several years to fully depreciate no matter what the general rules would allow. Vehicles with a gross vehicle weight rating above 6,000 pounds that are not designed primarily for passenger transport (certain SUVs and trucks) are generally exempt from these caps, though a separate Section 179 limit applies to heavy SUVs.

The IRS expects contemporaneous records to back up business use. For vehicles, that means a mileage log with the date, destination, business purpose, and miles for each trip. Weak records can cost you the accelerated deduction and trigger recapture.

Recapture: What You Give Back When You Sell

Accelerated depreciation reduces taxable income now, but the IRS takes some of it back when you sell the asset at a gain. The savings were real, but they were partly a deferral.

For tangible personal property, Section 1245 requires that any gain on sale be taxed as ordinary income to the extent of all depreciation previously deducted, including Section 179 and bonus depreciation.⁹ Buy a machine for $100,000, deduct the full cost, sell it later for $40,000, and that $40,000 gain is taxed as ordinary income, not at the lower capital gains rate.

Real property is different. Under Section 1250, gain attributable to straight-line depreciation on residential rental or commercial buildings is taxed at a maximum rate of 25% for individual taxpayers, known as unrecaptured Section 1250 gain. Any gain above the total depreciation taken qualifies for long-term capital gains treatment.

This is the trade-off at the heart of accelerated depreciation. You take a bigger deduction now at your current marginal rate, and you give some of it back when you dispose of the asset. The time value of money usually makes the acceleration worth it: a dollar of tax savings today outweighs a dollar of tax owed five or ten years from now.

ADS: When Acceleration Isn’t Available

The rules above cover the General Depreciation System, the default and the one that provides accelerated deductions. Some property must instead use the Alternative Depreciation System, which requires straight-line depreciation over longer recovery periods. ADS is mandatory for property used predominantly outside the United States, tax-exempt use property, tax-exempt bond-financed property, certain farming property held by an electing farming business, and imported property covered by an executive order.² A business can also elect ADS voluntarily on any asset class. Once made for a particular asset, the election is generally irrevocable.

State Taxes Follow Their Own Rules

Federal depreciation rules do not automatically apply to state income taxes. States range from full conformity with federal bonus depreciation and Section 179 to complete nonconformity, where businesses must add back federal accelerated deductions and use standard depreciation schedules for state purposes. A business in a nonconforming state can owe state tax on income that was sheltered federally. Confirm your state’s conformity position before relying on federal projections; the mismatch can amount to thousands of dollars in unexpected state tax liability.

1
Internal Revenue Service. Instructions for Form 4562
2
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
3
Internal Revenue Service. Publication 946 – How To Depreciate Property
4
Internal Revenue Service. Depreciation and Recapture
5
Office of the Law Revision Counsel. 26 USC 179 – Election To Expense Certain Depreciable Business Assets
6
eCFR. 26 CFR 1.179-2 – Limitations on Amount Subject to Section 179 Election
7
Internal Revenue Service. One, Big, Beautiful Bill Provisions
8
Internal Revenue Service. Revenue Procedure 2026-15
9
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property