Depreciation

Depreciation is a tax deduction that allows businesses to recover the cost of tangible property used in business operations over the asset’s useful life rather than deducting the entire cost in the year of purchase. This accounting method recognizes that assets like buildings, equipment, vehicles, and machinery decline in value over time due to wear, tear, and obsolescence, spreading the tax benefit of the purchase across multiple years.

To qualify for depreciation, property must meet specific requirements: it must be property you own, used in your business or income-producing activity, have a determinable useful life longer than one year, and be expected to last more than one year. Common depreciable assets include buildings and improvements, machinery and equipment, vehicles used for business, computers and office equipment, furniture and fixtures, and rental property. Land cannot be depreciated, though buildings and improvements on land can be.

The Modified Accelerated Cost Recovery System (MACRS) is the primary depreciation method for most business property placed in service after 1986. MACRS assigns assets to specific recovery periods: residential rental property (27.5 years), commercial property (39 years), vehicles and computers (5 years), office furniture (7 years), and various equipment categories (3, 5, 7, 10, 15, or 20 years). The system uses either straight-line depreciation (equal amounts each year) or accelerated methods (larger deductions in early years).

Section 179 allows businesses to deduct the full cost of qualifying property in the year of purchase rather than depreciating it, up to $1,220,000 for 2024, subject to a phase-out beginning at $3,050,000 in total purchases. Bonus depreciation permits additional first-year deductions, though this benefit is currently phasing down.

Depreciation is claimed on Form 4562 and reduces your taxable income annually. When selling depreciated property, accumulated depreciation reduces your basis, potentially increasing taxable gain. Special rules apply for listed property (vehicles, computers used partially for personal purposes), luxury automobiles, and assets converted from personal to business use. Maintaining accurate depreciation records is essential for tracking basis and calculating gain or loss upon disposition.