Depreciation is the recovery of the cost of business property over time. Property with a useful life beyond one year is capitalized and recovered through depreciation, depletion, or amortization.
Types of Property
Tangible Property
- Real property: land, buildings
- Personal property: equipment, machinery, vehicles, furniture
Intangible Property
- Software, patents, goodwill, trademarks
- Most intangibles are amortized over 180 months under Section 197
Requirements for Depreciation
Property must:
- Be owned by the taxpayer
- Be used in a business or income‑producing activity
- Have a determinable useful life
- Last more than one year
- Not be excluded property
Property that cannot be depreciated:
- Land
- Personal‑use property
- Inventory
- Property placed in service and disposed of in the same year
- Self‑created Section 197 intangibles
- Interests in entities (stock, partnership interests)
Depreciation Systems (MACRS)
Most property placed in service after 1986 uses MACRS, which includes:
GDS (General Depreciation System)
- Default system
- Uses 200% or 150% declining balance, switching to straight‑line
ADS (Alternative Depreciation System)
- Uses straight‑line
- Required for certain property or if elected
Depreciation Methods
Straight‑Line (S/L)
Equal deduction each year. Required for:
- Residential rental property (27.5 years)
- Nonresidential real property (39 years)
Declining Balance (DB)
Accelerated depreciation:
- 200% DB for 5‑ and 7‑year property
- 150% DB for 15‑ and 20‑year property
Recovery Periods (GDS)
- 5‑year: computers, vehicles, appliances, rental furniture
- 7‑year: office furniture, equipment
- 15‑year: qualified improvement property, land improvements
- 20‑year: farm buildings
- 27.5‑year: residential rental property
- 39‑year: nonresidential real property
Depreciation Conventions
Determine when depreciation begins:
Mid‑Month
- Residential rental property
- Nonresidential real property
Mid‑Quarter
Required if >40% of depreciable basis is placed in service in the last quarter.
Half‑Year
Default for most property.
Section 179 Deduction
Allows immediate expensing of qualifying property.
2025 Limits
- Deduction limit: $2,500,000
- Phase‑out threshold: $4,000,000
- SUV limit: $31,300
Requirements:
- Tangible personal property
- Acquired by purchase
- 50% business use
- Not for property held for income production (e.g., rental property)
Section 179 is limited by taxable business income. Excess carries forward indefinitely.
Bonus Depreciation — Section 168(k)
The One Big Beautiful Bill Act made 100% bonus depreciation permanent for qualified property acquired and placed in service after January 19, 2025.
Qualified property:
- MACRS property with recovery period ≤20 years
- Water utility property
- Off‑the‑shelf software
- Qualified improvement property
- Film, TV, live theater productions
Bonus depreciation is taken after Section 179 and before regular MACRS.
Section 168(n) — Qualified Production Property
Allows 100% bonus depreciation for certain nonresidential real property used in:
- Manufacturing
- Agriculture
- Chemical production
- Refining
Must meet strict construction and use requirements.
Listed Property Rules
Listed property includes:
- Passenger vehicles
- Property used for entertainment
- Certain communication and recording equipment
To qualify for Section 179 or bonus depreciation, listed property must be used >50% for business.
If business use drops below 50%:
- Section 179 is disallowed
- Accelerated depreciation is recaptured