LLC Depreciation Rules: MACRS, Section 179, and Bonus Depreciation

Depreciation rules for an LLC work in two stages: the LLC calculates the deduction at the entity level using MACRS, Section 179, or bonus depreciation, and then each member’s share flows through on a Schedule K-1 to reduce personal taxable income. What actually lands on your Form 1040 depends on three separate loss limits, and any depreciation you claim will eventually come back as recapture when the asset or your interest is sold. For 2026, restored 100% bonus depreciation and a higher Section 179 cap give most LLCs a straightforward path to writing off qualifying purchases in the year of purchase.

What an LLC Can Depreciate

To be depreciable, the asset must have a useful life longer than one year, lose value through wear or obsolescence, and be used in a trade or business or held to produce income. Inventory, supplies used up within a year, and personal-use property are out.

Land is the exclusion that catches new real estate owners. Land doesn’t wear out, so the IRS doesn’t let you depreciate it. When your LLC buys a property, you have to split the purchase price between land and building, and only the building portion goes on the depreciation schedule. The defensible ways to make that split are the county assessor’s ratio between land and improvements, or a professional appraisal. Arbitrary allocations invite audit adjustments.

Every calculation starts from the asset’s basis: the purchase price plus costs to place it in service, such as sales tax, shipping, and installation. That basis is the ceiling on total depreciation you can claim over the asset’s life.

MACRS: The Default Method

For nearly all tangible property placed in service after 1986, the Modified Accelerated Cost Recovery System is the required method unless the LLC elects Section 179 expensing.¹ MACRS puts each asset in a class based on the type of property, not how long you actually plan to use it.

The classes most LLCs touch:

5-year property: automobiles, computers, office machinery, research equipment.
7-year property: office furniture and fixtures, including desks, filing cabinets, and safes.
27.5-year property: residential rental buildings, meaning buildings where at least 80% of gross rental income comes from dwelling units.
39-year property: nonresidential real property such as office buildings, warehouses, and retail space.

Shorter-lived assets use the 200% declining balance method, which pushes bigger deductions into the early years.²

Timing Conventions

You don’t get a full year of depreciation just because you bought the asset in January. For personal property, the default half-year convention treats every asset as placed in service at the midpoint of the year: half a year of depreciation in year one, and the remaining half in the final year of the recovery period.

If more than 40% of the total basis of personal property placed in service during the year lands in the last three months, the mid-quarter convention takes over.³ Each asset’s first-year deduction then depends on the quarter it was placed in service, and October-through-December purchases get a much smaller write-off. The rule keeps entities from bunching purchases into late December for an oversized deduction.

Real property uses the mid-month convention: a building placed in service in March gets 9.5 months of depreciation in year one.

Section 179 Expensing in 2026

Rather than spread deductions across years, an LLC can elect Section 179 to deduct the full cost of qualifying property in the year it’s placed in service. For 2026, the base statutory limit is $2,500,000, subject to inflation adjustment, and the deduction phases out dollar-for-dollar once the entity places more than $4,000,000 of Section 179 property in service that year.⁴

The critical limit is the income cap: Section 179 cannot exceed the entity’s aggregate taxable income from all active trades or businesses. It can’t create or increase a net operating loss. Any excess carries forward until the LLC has enough income to absorb it.⁴

The election goes on Form 4562, attached to the entity return.⁵

100% Bonus Depreciation Is Back

Under the prior phase-out, bonus depreciation was set to fall to 40% in 2025 and 20% in 2026. The One, Big, Beautiful Bill permanently restored 100% bonus depreciation for qualified property both acquired and placed in service after January 19, 2025.⁶

Qualified property is new or used tangible personal property with a MACRS recovery period of 20 years or less. Both dates, acquisition and placed-in-service, must fall after January 19, 2025.

Bonus depreciation is not capped by the entity’s taxable income, so it can create or deepen a net loss that flows through to owners. It is also mandatory unless the LLC affirmatively elects out for an entire class of property for the year. For most LLCs buying equipment in 2026, the practical outcome is simple: the full cost of a qualifying asset can be written off in year one, either through 100% bonus or Section 179. The choice comes down to whether you want to be capped by active taxable income (Section 179) or want the flexibility to generate a loss (bonus).

The Vehicle Cap Is a Real Boundary

Passenger automobiles are the exception to all of the above. Section 280F imposes annual dollar caps on car and light-truck depreciation regardless of the method chosen. For vehicles placed in service in 2026, the first-year cap is $20,300 with bonus depreciation and $12,300 without, with lower caps in following years until the asset is fully recovered.⁷ A $60,000 business vehicle takes six or more years to fully recover, not one. Vehicles above 6,000 pounds gross weight that aren’t designed primarily for passenger transport generally fall outside these caps.

How the Deduction Reaches Your Personal Return

A multi-member LLC calculates total depreciation at the entity level and allocates each member’s share through the operating agreement. Members receive a Schedule K-1 reporting their portion of income, deductions, and credits, including depreciation.⁸ Each member then reports the K-1 numbers on Form 1040.

Most LLCs allocate depreciation in proportion to ownership percentage. Operating agreements can include special allocations that give a larger share of depreciation to specific members, but the IRS requires those allocations to have substantial economic effect: the tax result has to match a real economic arrangement, not a paper shift to the highest-bracket owner.⁹ Fail that test and the IRS redistributes the deduction based on economic interest.

A single-member LLC doesn’t file a partnership return. Depreciation is reported directly on Schedule C attached to the owner’s Form 1040.¹⁰ The calculation is the same, but there’s no K-1 and no allocation step.

Three Limits That Can Block Your Deduction

Even after the LLC allocates depreciation to you, three limits can stop you from using it. They apply in order, and the deduction has to clear each one.

Tax Basis

You can’t deduct losses beyond your outside basis in the LLC. Basis starts with cash and the adjusted basis of property contributed, rises with your share of income, and falls with distributions and your share of losses and deductions.¹¹ If depreciation drives allocated losses above your remaining basis, the excess is suspended until you rebuild basis through contributions or income.

Basis carries a back-end cost. When you sell your interest, your gain is sale price minus adjusted basis, so every dollar of depreciation that reduced your basis increases your taxable gain by the same dollar. The benefit is deferred, not free.

At-Risk

Losses that clear basis then have to clear the at-risk limit. You can deduct only up to the amount you have at risk in the activity, generally cash contributed plus amounts you’ve personally borrowed and are liable to repay.¹² Nonrecourse debt typically doesn’t count. Losses above your at-risk amount carry forward.

Passive Activity

This is the limit that hits hardest for LLC investors. Passive activity losses can only offset passive activity income, not wages, salary, or portfolio income.¹³ An activity is passive unless you materially participate. For LLC members, material participation is a year-by-year test; the cleanest route is logging more than 500 hours in the activity during the year. Miss all seven IRS participation tests and your depreciation-driven losses sit suspended until you generate passive income elsewhere or dispose of the entire interest.

Rental real estate has a narrow exception. If you actively participate, you can deduct up to $25,000 of passive rental losses against non-passive income, but that allowance phases out by 50 cents on the dollar as adjusted gross income climbs above $100,000 and disappears at $150,000. Limited partners generally can’t qualify as active participants.¹³

Suspended passive losses aren’t lost. They release in full when you dispose of your entire interest in the activity in a taxable transaction. Owners track these limits on Form 8582.¹⁴

Recapture When You Sell

Depreciation reduces basis, so it increases gain when the LLC sells the asset or when you sell your membership interest. That gain doesn’t all get long-term capital gain treatment.

For depreciable personal property (equipment, vehicles, machinery) under Section 1245, gain is recaptured as ordinary income to the extent of all depreciation previously claimed. An LLC that bought a $100,000 machine, wrote it fully off, and sold it for $40,000 has $40,000 of ordinary income, taxed at regular rates.¹⁵

For real property depreciated using the required straight-line method, the depreciation portion of the gain is “unrecaptured Section 1250 gain,” taxed at a federal maximum of 25%.¹⁶ Any gain above total depreciation qualifies for regular long-term capital gains rates. The K-1 breaks out the character of the gain so each owner reports the right amounts on their return.

How Depreciation Affects the QBI Deduction

Depreciation cuts two ways against the Section 199A qualified business income deduction. It reduces the QBI base, so it shrinks the 20% deduction. But for owners over the phase-in thresholds, the deduction is capped at the greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property immediately after acquisition.¹⁷ “Unadjusted basis” is the original cost before depreciation, and property counts for the longer of 10 years or the full MACRS recovery period. For real estate LLCs, buildings both generate depreciation deductions and support a larger QBI deduction under the second prong.

Records to Keep

A multi-member LLC files Form 1065 with Form 4562 attached to detail basis, method, recovery period, and current-year deduction for every depreciable asset.¹⁸⁵ Each member receives a K-1.

The record retention rule for depreciable property is stricter than the general three-year rule. You have to keep depreciation records until the statute of limitations expires for the year you dispose of the property.¹⁹ For a 39-year building, that’s over four decades of holding onto closing statements, purchase documents, and improvement receipts. Lose the paperwork that establishes original basis and you’ll have deductions disallowed on audit and no defensible way to calculate gain on sale.

Members need to track their own outside basis year over year: capital contributions, distributions, and cumulative shares of income and losses. The LLC won’t always maintain this for you, and reconstructing basis after the fact is one of the most expensive problems in pass-through tax preparation.

1
Internal Revenue Service. Topic No. 704, Depreciation
2
Internal Revenue Service. Publication 946, How to Depreciate Property
3
eCFR. 26 CFR 1.168(d)-1 – Half-Year and Mid-Quarter Conventions
4
Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets
5
Internal Revenue Service. About Form 4562, Depreciation and Amortization
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Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
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Internal Revenue Service. Rev. Proc. 2026-15, Depreciation Deductions for Passenger Automobiles
8
Internal Revenue Service. Income – Schedules K-1 and Rental
9
Office of the Law Revision Counsel. 26 U.S. Code 704 – Partners Distributive Share
10
Internal Revenue Service. Instructions for Schedule C Form 1040
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Office of the Law Revision Counsel. 26 U.S. Code 705 – Determination of Basis of Partners Interest
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Office of the Law Revision Counsel. 26 U.S. Code 465 – Deductions Limited to Amount at Risk
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Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited
14
Internal Revenue Service. About Form 8582, Passive Activity Loss Limitations
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Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
16
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
17
Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income
18
Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income
19
Internal Revenue Service. How Long Should I Keep Records