Depreciation
A tax deduction that spreads the cost of a business asset over its useful life. Section 179 and bonus depreciation may allow full first-year expensing for qualifying assets.
Depreciation is the process of deducting the cost of a tangible business asset (equipment, vehicles, machinery, buildings) over its useful life rather than all at once. The IRS assigns recovery periods to different asset classes — for example, 5 years for computers and office equipment, 7 years for furniture, and 27.5 or 39 years for real property.
The most common depreciation method is MACRS (Modified Accelerated Cost Recovery System), which front-loads larger deductions in the early years of an asset's life. However, two provisions often allow full immediate expensing: Section 179, which lets you deduct up to $2,500,000 of qualifying asset costs in 2025 (raised by OBBBA), and bonus depreciation.
Bonus depreciation was in a TCJA phase-down: 100% through 2022, 80% in 2023, and 60% in 2024. The One Big Beautiful Bill Act (OBBBA), signed July 2025, restored the 100% rate permanently. 100% bonus depreciation applies to qualified property ACQUIRED after January 19, 2025 (OBBBA §70301(c)(1)) — not to property merely placed in service after that date; a written binding contract fixes the acquisition date (§70301(c)(4)). Property acquired on or before January 19, 2025 stays on the pre-OBBBA §168(k)(6)(A) ladder no matter when it is placed in service — 40% for a 2025 placed-in-service year, 20% for 2026, and 0% from 2027. Section 179 provides an alternative path to full expensing for many small businesses. Properly using depreciation strategies can significantly reduce your taxable income in the years you invest in business assets.
How it works
Depreciation spreads the cost of a business asset — equipment, vehicles, machinery, buildings — across the years it is actually used, rather than letting you deduct the full purchase price the moment you buy it. The IRS assigns a recovery period to each asset class under MACRS, the standard depreciation method, ranging from 5 years for computers and office equipment up to 27.5 or 39 years for real property.
You calculate and claim depreciation on Form 4562, and the resulting deduction flows through to Schedule C or the applicable business return each year, reducing taxable income a little at a time under MACRS's front-loaded schedule. Two special provisions can bypass that slow schedule: Section 179, which lets you deduct up to $2,500,000 of qualifying asset costs in 2025, and bonus depreciation, which OBBBA restored to 100%. 100% bonus depreciation applies to qualified property ACQUIRED after January 19, 2025 (OBBBA §70301(c)(1)) — not to property merely placed in service after that date; a written binding contract fixes the acquisition date (§70301(c)(4)).
A common point of confusion is thinking Section 179 and bonus depreciation are the same thing — Section 179 has its own dollar cap and phases out once total qualifying purchases exceed a threshold, while bonus depreciation applies a flat percentage with no dollar cap and generally cannot be selectively applied asset by asset the way Section 179 can. Selling a depreciated asset can also trigger depreciation recapture, taxing part of the gain as ordinary income rather than capital gain, which surprises people who forget how much they already deducted.
Example: expensing equipment under Section 179
A small business buys $40,000 of qualifying equipment during 2025, well under the $2,500,000 Section 179 limit and the $4,000,000 phase-out threshold for the year.
Instead of depreciating the equipment over its multi-year MACRS recovery period, the business elects Section 179 and deducts the full $40,000 in the year it was placed in service, reducing that year's taxable income immediately.
Frequently asked questions
What is the difference between Section 179 and bonus depreciation?
Do I have to depreciate business equipment, or can I deduct it all at once?
What happens if I sell an asset I already depreciated?
Related Terms
Business Expenses
Costs incurred in running a business that are deductible on your tax return if they are ordinary (common in your industry) and necessary (helpful and appropriate for your trade).
Schedule C
The IRS form (Schedule C of Form 1040) used by sole proprietors and single-member LLCs to report business income and expenses. The net profit flows to your personal tax return.
Sole Proprietor
An individual who owns and operates an unincorporated business by themselves. Business income and expenses are reported on Schedule C of the personal tax return.