MACRS Depreciation: How to Depreciate Business Assets

MACRS (the Modified Accelerated Cost Recovery System) is the method the IRS requires for depreciating most business property placed in service after 1986. Each asset gets a recovery period (3, 5, 7, 10, 15, 20, 27.5, or 39 years), a method (200% or 150% declining balance, or straight-line), and a convention that sets how much you deduct in the first and last years. On top of MACRS, you can usually write off the whole cost in year one with 100% bonus depreciation — permanently restored for property acquired after January 19, 2025 — or with Section 179, which is capped at $2,560,000 for 2026.

This guide explains each choice in the order you make it on Form 4562. To run the numbers for a specific asset, use the MACRS depreciation calculator. The underlying rules are in IRS Publication 946, How to Depreciate Property.

What changed for 2025 and 2026

The One Big Beautiful Bill Act (Public Law 119-21, signed July 4, 2025) rewrote the timeline that had been phasing bonus depreciation down since 2023:

"Acquired" means the date you signed a written binding contract, not the delivery date. Equipment ordered under a binding contract in December 2024 and delivered in March 2026 is still on the old schedule (20% in 2026).

Section 179 also grew. OBBBA set the limit at $2.5 million with a $4 million phase-out threshold for 2025, indexed after that. For 2026, Rev. Proc. 2025-32 sets the limit at $2,560,000 and the phase-out threshold at $4,090,000. The separate cap for heavy SUVs is $32,000.

The law also added a new elective 100% deduction (see Notice 2026-16) for qualified production property — nonresidential buildings used in manufacturing, production, or refining — for construction beginning after January 19, 2025 and before 2029. Ordinary offices, warehouses, and retail space don't qualify.

Step 1: determine the depreciable basis

Basis is usually cost: purchase price, sales tax, delivery, installation, and testing. A few adjustments:

• Trade-ins: since 2018, trading in equipment is a sale of the old asset plus a purchase of the new one; the full cost of the new asset is the basis.
• Personal property converted to business use: basis is the lower of your adjusted basis or fair market value on the conversion date.
• Partial business use: multiply by the business-use percentage. A $40,000 truck used 75% for business has a $30,000 depreciable basis.
• Small purchases: the de minimis safe harbor in Treas. Reg. 1.263(a)-1(f) lets you expense items costing $2,500 or less per invoice or item ($5,000 if you have audited financial statements) instead of depreciating them. You elect it each year with a statement attached to your return.

Step 2: assign the property class

Qualified improvement property (QIP) is an improvement to the interior of an existing nonresidential building, other than enlargements, elevators, escalators, or the internal structural framework. As 15-year property it is eligible for bonus depreciation.

Land never depreciates. When you buy a building, split the price between land and building; the local property tax assessment ratio is a common, defensible method.

Step 3: GDS or ADS?

The General Depreciation System is the default. The Alternative Depreciation System uses longer lives and straight-line, and it is required for:

• Listed property (vehicles, for example) used 50% or less for business
• Tangible property used predominantly outside the United States
• Tax-exempt use property and tax-exempt bond-financed property
• Residential rental property, nonresidential real property, and QIP of a real property business that elects out of the business interest limit

ADS also applies if you elect it for a class of property. Typical ADS lives: 10 years for office furniture, 5 for cars, 6 for computers, 20 years for QIP, 30 years for residential rental property, and 40 years for nonresidential real property. Property on ADS is not eligible for bonus depreciation.

Step 4: apply the convention

Half-year (the default for personal property). Everything placed in service during the year is treated as placed in service at mid-year. That's why a 5-year asset is depreciated over six tax years and a 7-year asset over eight.

Mid-quarter. If more than 40% of the depreciable basis of personal property you placed in service during the year landed in the last three months, all of that year's personal property uses the mid-quarter convention. First-year rates for 5-year property become 35% (Q1), 25% (Q2), 15% (Q3), or 5% (Q4). Assets you fully expense under Section 179 are excluded from the 40% test, which is one practical way to avoid it.

Mid-month (real property). Buildings get a half month in the month placed in service. A $390,000 commercial building placed in service in July gets $390,000 × 1.177% = $4,590 in year one and $10,000 (2.564%) in each full year.

Step 5: decide on bonus depreciation and Section 179

Bonus depreciation (Section 168(k))

• Applies automatically (Notice 2026-11 is the IRS guidance on the OBBBA changes) to qualifying property: MACRS property with a recovery period of 20 years or less, off-the-shelf software, QIP, and certain water utility property.
• New or used, as long as the used property wasn't previously used by you and wasn't bought from a related party.
• No dollar cap and no income limit; it can create a net operating loss.
• You can elect out by property class (all 5-year property placed in service that year, for example). For the first tax year ending after January 19, 2025, a transitional election also lets you use 40% (60% for certain long-production property) instead of 100%.

Section 179

• Elected asset by asset and in any dollar amount up to the limit.
• Limited to taxable income from active trades or businesses (including W-2 wages); the unused amount carries forward.
• Includes some property bonus excludes: roofs, HVAC, fire protection, alarm, and security systems installed on nonresidential buildings.
• Phase-out: every dollar of qualifying purchases above $4,090,000 in 2026 reduces the $2,560,000 limit by a dollar, so it disappears completely at $6,650,000.

Order of operations

Section 179 first, then bonus on the remaining basis, then regular MACRS on whatever is left. Example: a $90,000 machine (7-year). Elect $30,000 of Section 179, elect out of bonus. MACRS basis = $60,000. Year 1 = $30,000 + ($60,000 × 14.29%) = $30,000 + $8,574 = $38,574.

Vehicles: the special rules

Passenger automobiles — generally cars, light trucks, and vans rated at 6,000 lbs gross vehicle weight or less — are listed property subject to annual dollar caps under Section 280F, regardless of bonus or Section 179. For vehicles placed in service in 2026, Rev. Proc. 2026-15 sets these caps:

The caps assume 100% business use; multiply by your business-use percentage. A $55,000 sedan used 100% for business is capped at $20,300 in year one even with 100% bonus, and the remaining basis is recovered at the later-year caps.

Vehicles over 6,000 lbs GVWR are not subject to those caps. A heavy pickup used 100% for business can be fully expensed with bonus depreciation. If you use Section 179 on a heavy SUV instead, the 2026 Section 179 cap for that vehicle is $32,000; bonus can cover the rest.

Other vehicle rules:

• Business use must exceed 50% to use bonus, Section 179, or accelerated MACRS.
• Keep a contemporaneous mileage log; the business-use percentage is the first thing an examiner asks for.
• If business use later drops to 50% or below, you recapture the excess depreciation as ordinary income.
• Choosing the standard mileage rate in the first year keeps you out of actual-cost depreciation for that vehicle; the rate already includes a depreciation component (35 cents of each business mile for 2026). The 2026 business rate is 72.5 cents per mile for January–June and 76 cents from July 1, after a mid-year increase (IRS standard mileage rates).

Recapture when you sell

Depreciation lowers your basis, so the gain on a sale is larger.

Equipment (Section 1245). Gain up to the total depreciation taken is ordinary income. Example: you buy a $50,000 machine, deduct $30,000, and sell it for $35,000. Adjusted basis is $20,000, gain is $15,000, and all $15,000 is ordinary income because it's less than the $30,000 of depreciation. Only gain above the original $50,000 cost would be capital gain.

Fully expensed equipment. If you took 100% bonus on that machine, basis is $0 and the entire $35,000 sale price is ordinary income. That's the trade-off of the year-one write-off.

Buildings (Section 1250). Straight-line depreciation on real property is "unrecaptured Section 1250 gain," taxed at a maximum 25% rather than as ordinary income.

Worked example: a contractor's 2026 purchases

A remodeling contractor places these assets in service in 2026, all acquired after January 19, 2025:

With 100% bonus: skid steer $38,000 + computers $4,200 + shelving $6,500 + pickup ($62,000 × 90% = $55,800) = $104,500 deducted in 2026.

If the contractor's 2026 profit before depreciation is only $70,000, the result is a $34,500 loss. A better plan might be to elect out of bonus for 5-year property and use Section 179 instead to bring profit to the level they want, letting the rest depreciate on the 20%/32%/19.2% schedule. The contractor tax deductions guide covers the other expenses that go into that profit number.

State returns don't always follow

Many states decouple from federal bonus depreciation. California, for example, does not allow bonus depreciation at all and limits Section 179 to $25,000, with a phase-out starting at $200,000 of purchases. If your state decouples, you'll keep a separate state depreciation schedule and an addback adjustment each year until the asset is fully depreciated for state purposes.

Common mistakes

1. Halving the first-year table rate. The 20% (5-year) and 14.29% (7-year) rates already include the half-year convention.
2. Depreciating land. Allocate purchase price between land and building.
3. Using 27.5 years for a home office. A home office is nonresidential: 39 years. The home office deduction guide covers it.
4. Missing the mid-quarter trap. Heavy December buying can cut year-one depreciation on every asset bought that year.
5. Skipping depreciation. Basis drops by "allowed or allowable" depreciation anyway. Fix missed depreciation with Form 3115 rather than ignoring it.
6. Forgetting the effect on estimated taxes. A large year-end purchase lowers your fourth-quarter payment; see how to pay quarterly estimated taxes.

Where it goes on the return

Form 4562 has a part for each step: Part I for Section 179, Part II for the special (bonus) allowance, Part III for regular MACRS, and Part V for listed property such as vehicles. The total flows to Schedule C line 13, Form 1065, or Form 1120-S. Once your depreciation is settled, the 1099 tax calculator shows the income tax and self-employment tax on the profit that's left.