Writing off fixed assets on your taxes comes down to three paths: expense small purchases immediately under the de minimis safe harbor, deduct the full cost of qualifying larger assets in the year you buy them using Section 179 or bonus depreciation, or recover the cost gradually under the Modified Accelerated Cost Recovery System (MACRS). The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, permanently restored 100% bonus depreciation and raised the Section 179 base cap to $2.5 million, so for most businesses the full cost of qualifying equipment placed in service in 2026 can be deducted the same year.1Internal Revenue Service. One Big Beautiful Bill Provisions
Expense It Now or Capitalize It
The first question is whether the purchase gets deducted this year or spread over its useful life. The general rule: if property will last more than one year, you capitalize it and depreciate. Routine repairs stay deductible as they happen, but costs that adapt property to a new use or materially increase its value must be capitalized.
The IRS provides a shortcut for low-cost items through the de minimis safe harbor. Businesses with an applicable financial statement (AFS), such as an audited set of financials, can expense items costing $5,000 or less per invoice or item.2Internal Revenue Service. Tangible Property Final Regulations Businesses without an AFS have a threshold of $2,500 per invoice or item.3Internal Revenue Service. IRS Notice 2015-82 – Increase in De Minimis Safe Harbor Limit for Taxpayers Without an Applicable Financial Statement To use either threshold, you need a written accounting policy in place at the start of the tax year stating that items below the threshold will be expensed rather than capitalized. Individual tools, minor computer peripherals, and inexpensive furniture typically fit here. Anything above the threshold gets capitalized and moves into one of the depreciation regimes below.
Section 179 Expensing
Section 179 lets you deduct the entire cost of qualifying property in the year you place it in service, up to an annual cap. The OBBBA raised the base limit from $1 million to $2.5 million and increased the phase-out threshold from $2.5 million to $4 million, both indexed for inflation starting in 2025.4Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets For tax years beginning in 2026:
- Maximum deduction: $2,560,000
- Phase-out begins at: $4,090,000 in total Section 179 property placed in service
Once your total purchases exceed $4,090,000, the deduction shrinks dollar-for-dollar. At $6,650,000 in total purchases, the deduction disappears entirely.5Internal Revenue Service. Publication 946 – How To Depreciate Property
Qualifying property includes tangible personal property such as machinery, equipment, and off-the-shelf computer software, plus certain improvements to nonresidential buildings. You elect Section 179 on IRS Form 4562 for the year you place the property in service.6Internal Revenue Service. About Form 4562 – Depreciation and Amortization Miss the election and you’re stuck depreciating the asset under regular MACRS.
The main constraint: Section 179 cannot create or increase a net operating loss. Your deduction is capped at your total taxable income from all active trades or businesses. If income limits the deduction, the unused portion carries forward indefinitely.
Bonus Depreciation at 100%
Bonus depreciation gives an immediate deduction for a percentage of the cost of qualifying property, with no dollar ceiling and no income limitation. It can create or increase a net operating loss, which makes it more forgiving than Section 179 for businesses with heavy capital spending or thin margins.
The rate had been phasing down since 2022 and reached 40% in 2025. The OBBBA permanently restored 100% bonus depreciation for most qualifying property acquired and placed in service after January 19, 2025, with no scheduled sunset.1Internal Revenue Service. One Big Beautiful Bill Provisions The 100% rate applies to 2026 and beyond unless Congress changes it.
Qualifying property covers new and used assets, provided the property wasn’t previously used by you or a related party. The asset must be MACRS property with a recovery period of 20 years or less, which sweeps in most equipment, vehicles, furniture, and qualified improvement property (QIP). QIP is interior improvement work done to a nonresidential building after that building was placed in service, and it gets the 15-year recovery period plus 100% bonus treatment. Buildings themselves, on 27.5-year or 39-year schedules, don’t qualify. You can elect out of bonus depreciation on a class-by-class basis if you’d rather spread deductions.
How to Layer the Two
Section 179 and bonus depreciation work together, and the usual play is to apply Section 179 first up to the annual limit and taxable income, then apply 100% bonus depreciation to whatever cost remains. When bonus is at 100%, the combination lets most businesses write off the full cost of qualifying assets in year one.
The layering matters most when the Section 179 income cap bites. If your business buys $3 million in equipment but has $1.8 million in taxable income, Section 179 stops at $1.8 million. Bonus depreciation then covers the remaining $1.2 million with no income restriction, delivering a full deduction and potentially a net operating loss to carry forward.
MACRS for Everything Else
If you don’t expense an asset outright, MACRS is the mandatory federal depreciation method for nearly all tangible business property placed in service after 1986.7eCFR. 26 CFR 1.168(a)-1 – Modified Accelerated Cost Recovery System MACRS ignores salvage value and assigns every asset to a recovery period based on its type.
Recovery Periods
The common classes:8Office of the Law Revision Counsel. 26 US Code 168 – Accelerated Cost Recovery System
- 5-year property: computers, office equipment, cars, light trucks, and certain manufacturing equipment
- 7-year property: office furniture, appliances, and most general-purpose machinery
- 15-year property: land improvements such as fences, sidewalks, and parking lots, plus qualified improvement property
- 27.5-year property: residential rental buildings
- 39-year property: nonresidential (commercial) buildings
Misclassifying an asset is a common audit trigger. IRS Publication 946 has full asset class tables when you’re unsure.
Method and Conventions
For most personal property (everything except buildings), MACRS uses the 200% declining balance method, which front-loads deductions and automatically switches to straight-line in the year that produces a larger deduction. Buildings use straight-line over the full recovery period.
The default half-year convention treats personal property as placed in service at the midpoint of the tax year regardless of the actual date, so you get half a year’s depreciation in year one and half in the final year. Real property uses the mid-month convention. One trap catches businesses that concentrate purchases at year-end: if more than 40% of your total depreciable personal property for the year lands in the last three months, the mid-quarter convention takes over and reduces first-year deductions for those late purchases.9eCFR. 26 CFR 1.168(d)-1 – Half-Year and Mid-Quarter Conventions
When Depreciation Starts
Depreciation begins when property is “placed in service,” meaning ready and available for its specific use, even if you haven’t started using it. A rental house is placed in service when it’s available for tenants, not when a lease is signed. Equipment sitting in the warehouse waiting for installation isn’t placed in service until it’s set up and functional.10Internal Revenue Service. Depreciation Reminders – Fact Sheet FS-2006-27 Property placed in service and disposed of in the same year cannot be depreciated at all.
Vehicles Are a Special Case
Passenger vehicles are subject to special depreciation caps that override the normal rules. For passenger automobiles placed in service during 2026:11Internal Revenue Service. Rev. Proc. 2026-15 – Depreciation Limitations for Passenger Automobiles
With bonus depreciation:
- Year 1: $20,300
- Year 2: $19,800
- Year 3: $11,900
- Each succeeding year: $7,160
Without bonus depreciation:
- Year 1: $12,300
- Year 2: $19,800
- Year 3: $11,900
- Each succeeding year: $7,160
A $60,000 sedan used 100% for business can’t be fully written off in year one even with bonus depreciation. You deduct $20,300 the first year, then work through the remaining cost at the schedule above. Partial personal use scales the deduction down. If business use drops to 50% or less in any year, you have to recapture excess depreciation previously claimed.
Heavy vehicles avoid these caps. Trucks, vans, and SUVs with a gross vehicle weight rating above 6,000 pounds sidestep the passenger automobile limits. A qualifying heavy pickup or cargo van can be fully expensed under Section 179 and bonus depreciation in year one. Heavy SUVs (over 6,000 lbs but under 14,000 lbs) do qualify for expanded treatment, but Section 179 is capped at $32,000 for them; bonus depreciation then covers the remaining cost with no additional cap.
What Happens When You Sell
Selling, trading, or scrapping a depreciated asset has tax consequences that depend on how much depreciation you already claimed. Your adjusted basis is original cost minus all depreciation and expensing deductions. Gain or loss equals sale price minus adjusted basis, reported on IRS Form 4797.12Internal Revenue Service. About Form 4797 – Sales of Business Property
For machinery, equipment, vehicles, and other Section 1245 personal property, any gain up to the total depreciation claimed is “recaptured” and taxed as ordinary income rather than at the lower capital gains rate.13Justia Law. 26 US Code 1245 – Gain From Dispositions of Certain Depreciable Property Only gain above the total depreciation claimed qualifies for capital gains treatment, and since most equipment sells for less than original cost, the whole gain is usually ordinary income.
This is the tradeoff behind aggressive first-year expensing. If you expense the full $80,000 cost of a machine under Section 179 or bonus, your adjusted basis drops to zero. Sell that machine three years later for $25,000 and the entire $25,000 is ordinary income. For assets you plan to sell quickly at meaningful resale value, standard MACRS depreciation sometimes produces a better after-tax result.
Buildings and other Section 1250 property follow friendlier rules. Because real property is depreciated straight-line, the “additional depreciation” subject to ordinary income recapture is typically zero. The gain attributable to straight-line depreciation is taxed at a maximum rate of 25% as unrecaptured Section 1250 gain, and any gain above the total depreciation claimed is taxed at regular capital gains rates.
If you abandon an asset with no sale proceeds, the remaining adjusted basis is deductible as an ordinary loss.
Fixing Prior-Year Depreciation Mistakes
If you miscalculated depreciation in earlier years, missed deductions, or need to reclassify assets after a cost segregation study, you don’t amend old returns. You file IRS Form 3115 (Application for Change in Accounting Method) and make a Section 481(a) adjustment, a one-time catch-up that accounts for the difference between what you actually deducted and what you should have deducted through the end of the prior tax year.14Internal Revenue Service. Instructions for Form 3115 – Application for Change in Accounting Method
Most depreciation corrections qualify as automatic method changes, so no IRS approval letter and no user fee. Form 3115 goes in with the return for the year the change takes effect. A favorable adjustment (you underclaimed) is taken entirely in the year of change. An unfavorable adjustment (you overclaimed) is generally spread over four years.
State Rules Often Diverge
Federal depreciation doesn’t automatically flow through to state returns. A majority of states have historically decoupled from federal bonus depreciation because the upfront revenue hit is too large for state budgets. Some states conform automatically and then pass legislation to decouple; others reference the Internal Revenue Code as of a fixed date, so newer federal changes don’t apply at the state level until the legislature updates the reference.
After the OBBBA’s permanent restoration of 100% bonus depreciation, several states have already moved to decouple and more are likely to follow. In non-conforming states, you’ll compute depreciation one way federally and another way for the state return, typically standard MACRS without bonus. That creates a book-tax difference to track each year until the asset is fully depreciated. If you operate in multiple states, check each state’s conformity before filing; the timing difference can meaningfully change cash flow.