A fixed asset is a tangible, long-term resource a business owns and uses in its operations to generate revenue over more than one year. On the balance sheet, fixed assets sit under Property, Plant, and Equipment, and they include things like buildings, machinery, vehicles, furniture, and land. They aren’t held for resale, and they don’t get used up in a single accounting period. Instead, their cost comes off the books gradually through depreciation.
The Three Tests
An item qualifies as a fixed asset when it meets all three of these conditions:1Internal Revenue Service. Publication 946 How To Depreciate Property
- It’s physical. You can see it and touch it.
- It’s used in the business, not held as inventory for customers.
- Its useful life is longer than one year.
A commercial oven a bakery uses to make bread is a fixed asset. The flour in the pantry is not. A car dealership’s lot full of cars is inventory; the tow truck the dealership uses to move them around is a fixed asset. Same object, different role, different accounting.
Common Examples
Most fixed assets fall into a handful of familiar categories:
- Buildings such as offices, warehouses, retail stores, and factories
- Machinery and equipment, from CNC machines to HVAC systems
- Vehicles like delivery trucks, company cars, and forklifts
- Furniture and fixtures, including desks, shelving, and display cases
- Land under a factory or office
- Land improvements such as parking lots, fencing, and landscaping
Land is the one item to flag. It’s a fixed asset, but because it doesn’t wear out or become obsolete, it’s never depreciated.2Internal Revenue Service. Topic No. 704, Depreciation The building on that land depreciates; the land itself stays on the books at its original cost for as long as the business owns it.
Fixed Assets vs. Current Assets
The line between the two comes down to time. Current assets are things a business expects to convert into cash, sell, or use up within a year: cash itself, accounts receivable, inventory. Fixed assets hang around for years. They’re used gradually rather than consumed in a single transaction, which is why they get a completely different set of accounting rules.
What Gets Recorded at Purchase
When a business acquires a fixed asset, it records the item at historical cost. That figure becomes the cost basis, and every future depreciation calculation flows from it.
Cost basis isn’t just the sticker price. It includes every cost necessary to get the asset in place and working. IRS Publication 946 specifically lists sales tax, freight charges, and installation and testing fees as amounts that go into basis. For real estate, settlement costs like legal fees, title insurance, survey charges, and recording fees also get capitalized.1Internal Revenue Service. Publication 946 How To Depreciate Property
Say you buy a $500,000 piece of equipment, pay $15,000 in shipping, and spend $10,000 pouring a foundation for it. Your capitalized cost is $525,000, and that’s the number you depreciate. Training employees to run the machine doesn’t count. That gets expensed right away, because it doesn’t make the asset itself ready for use.3Internal Revenue Service. Tangible Property Final Regulations
Capitalize or Expense?
Not every dollar spent on tangible property has to be capitalized. The IRS requires capitalization of costs to acquire, produce, or improve tangible property, but ordinary repairs and maintenance that simply keep an asset in its current operating condition can be deducted immediately as an expense.3Internal Revenue Service. Tangible Property Final Regulations The distinction matters. A capitalized cost gets spread over years; an expensed cost reduces taxable income now.
The De Minimis Safe Harbor
Small purchases sit in a gray area. A $400 printer technically meets every fixed asset test, but nobody wants to depreciate it over five years. The IRS lets businesses elect a de minimis safe harbor and expense low-cost tangible property outright:
- Up to $5,000 per item or invoice for businesses with an applicable financial statement (roughly, audited financials or SEC filings)
- Up to $2,500 per item or invoice for businesses without one
The limit is per item, and related costs like delivery or installation on the same invoice count toward it.4Internal Revenue Service. Increase in De Minimis Safe Harbor Limit for Taxpayers Without an Applicable Financial Statement Using the election requires attaching a statement to the tax return each year. It doesn’t apply to inventory or land.
Depreciation: How the Cost Comes Off Over Time
Depreciation spreads a fixed asset’s cost over the years it produces revenue. It isn’t an attempt to estimate resale value. It’s a way to match the cost of the asset against the income it helps produce.
Three inputs drive the calculation: cost basis, useful life, and salvage value (what you expect the asset to be worth at the end). For tax purposes, the IRS takes most of the guesswork out of useful life by assigning each type of property to a class under the Modified Accelerated Cost Recovery System, or MACRS.
MACRS Recovery Periods
MACRS groups assets by type and assigns each group a recovery period. The most common ones:1Internal Revenue Service. Publication 946 How To Depreciate Property
- 5-year property: cars, trucks, computers, office machinery, research equipment
- 7-year property: office furniture and fixtures, agricultural machinery, and anything without a designated class life
- 15-year property: land improvements like fencing and parking lots
- 27.5-year property: residential rental buildings
- 39-year property: nonresidential real property such as offices, stores, and warehouses
The recovery period sets how many years the deductions are spread across. A delivery truck comes off the books in five years. An office building takes 39. The cash flow difference is real.
Methods
Straight-line depreciation divides the depreciable cost equally across each year of the recovery period. A $100,000 machine with a 5-year life and $10,000 salvage value yields $18,000 of depreciation per year for five years.
Accelerated methods like double-declining balance front-load the deductions, giving bigger write-offs early and smaller ones later. MACRS uses a version of declining balance for most personal property, switching to straight-line partway through. Whichever method is used, the total depreciation over the asset’s life adds up to the same amount. Only the timing changes.
Section 179 and Bonus Depreciation
Two provisions in the tax code let businesses skip the multi-year schedule and deduct most or all of an asset’s cost in the year it goes into service.
Section 179 lets a business elect to expense qualifying property immediately.5Office of the Law Revision Counsel. 26 US Code 179 – Election To Expense Certain Depreciable Business Assets Qualifying property includes tangible personal property used in the active conduct of a trade or business (machinery, equipment, off-the-shelf software) and certain improvements to nonresidential real property like roofs, HVAC, fire protection, and security systems.6Internal Revenue Service. Instructions for Form 4562 For 2026, the inflation-adjusted deduction limit is $2,560,000, phasing out dollar-for-dollar once qualifying property placed in service exceeds $4,090,000 and disappearing at $6,650,000. The deduction also can’t exceed taxable income from active trades or businesses in the same year, though unused amounts carry forward.
Bonus depreciation is automatic rather than elective, has no dollar cap, and has no income limitation. The One Big Beautiful Bill Act, signed in July 2025, permanently restored the bonus depreciation rate to 100% for qualifying property acquired and placed in service after January 19, 2025, and eliminated the phase-down schedule that had been shrinking the rate since 2023.7Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill8Office of the Law Revision Counsel. 26 US Code 168 – Accelerated Cost Recovery System In practice, most businesses placing equipment into service in 2026 can write off the full cost in year one through one route or the other.
When the Asset Leaves the Business
Every fixed asset eventually leaves the books, whether sold, traded, scrapped, or destroyed. At disposal, both the original cost and the accumulated depreciation come off the records. What remains is net book value: original cost minus depreciation taken. Compare that to what you actually received, and the difference is a gain or a loss on the income statement.
Depreciation Recapture
This is where disposal gets expensive if you didn’t see it coming. When depreciable personal property is sold at a gain, the IRS doesn’t treat the whole gain as capital gain. Under Section 1245, any gain up to the total depreciation previously deducted gets reclassified as ordinary income and taxed at your regular rate.9Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property Only gain above the original cost gets capital gains treatment.
This is the trade-off for the accelerated deductions. A business that took 100% bonus depreciation on a piece of equipment and later sells it will see the entire sale price taxed as ordinary income up to the original cost. It catches small business owners off guard more than almost any other rule.
Casualty, Theft, and Condemnation
When a fixed asset is destroyed, stolen, or condemned, the tax code treats the insurance payout or condemnation award as sale proceeds. If they exceed the asset’s adjusted basis, there’s a taxable gain even though you didn’t choose to sell. Section 1033 offers relief: reinvest the proceeds in similar replacement property within the required replacement period, and the gain can be deferred rather than taxed immediately. Keep the money and the gain is taxable like any other disposal.