Purchasing equipment, vehicles, furniture, and other assets can be a significant investment for a business. Fortunately, depreciation allows businesses to recover the cost of many of these assets through tax deductions over time. Depending on the property and applicable tax rules, businesses may also be able to accelerate those deductions, making depreciation an important consideration when planning capital purchases. Depreciation generally applies when property is placed in service for use in a trade or business or to produce income. Depreciation continues until the property’s cost or other basis has been fully recovered or the property is retired from service, whichever occurs first.
What property can be depreciated?
Common depreciable business assets include machinery, equipment, buildings, vehicles, and furniture. Land itself cannot be depreciated, although certain buildings and land improvements may qualify. If an asset, such as a vehicle, is used for both business and personal purposes, generally only the portion attributable to qualified business or income-producing use may be depreciated. In general, property must meet several requirements to be depreciable. A business generally must:
- Own the property, including property subject to debt.
- Use the property in a business or income-producing activity.
- Be able to determine the property’s useful life, meaning it is expected to wear out, decay, become obsolete, or otherwise lose value over time.
- Expect the property to have a useful life extending substantially beyond the year it is placed in service.
- Ensure the property is not specifically excluded from depreciation under federal tax rules.
Special rules may apply to certain types of property, including vehicles and other assets subject to additional limitations.
Understanding depreciation methods
Most tangible business and investment property placed in service after 1986 is depreciated under the Modified Accelerated Cost Recovery System (MACRS). MACRS includes the General Depreciation System (GDS) and Alternative Depreciation System (ADS), which use different recovery periods and methods depending on the type of property and how it is used. In some situations, businesses use the straight-line method, which generally spreads depreciation evenly over an asset’s applicable recovery period. The appropriate method, recovery period, and convention depend on the property and applicable tax rules. Businesses may also have opportunities to deduct a larger portion—or potentially all—of an eligible asset’s cost in the year it is placed in service through Section 179 or bonus depreciation.
Section 179 limits for 2026
For tax years beginning in 2026, businesses may elect to expense up to $2.56 million of qualifying Section 179 property. The deduction begins to phase out when the total cost of Section 179 property placed in service during the year exceeds $4.09 million. The 2026 Section 179 deduction for certain sport utility vehicles is limited to $32,000. Section 179 is subject to additional requirements and limitations, including a taxable income limitation, so the maximum deduction may not be available in every situation.
100% bonus depreciation is back
Another significant consideration for businesses is bonus depreciation. Under changes enacted in 2025, a permanent 100% additional first-year depreciation deduction is generally available for eligible property acquired and placed in service after January 19, 2025. This can allow a business to immediately deduct the full cost of certain qualifying property rather than recovering that cost over several years. Different rules can apply to property acquired before January 20, 2025. For qualifying property acquired before that date but placed in service during 2026, the prior-law bonus depreciation percentage is generally 20%. The law also created a separate elective 100% depreciation deduction for certain qualified production property, generally qualifying nonresidential real property used in manufacturing, production, agricultural production, or refining activities. This provision has its own eligibility requirements and generally applies to qualified property placed in service after July 4, 2025, and before January 1, 2031.
Plan before making major purchases
Depreciation rules can have a meaningful impact on the timing of a business’s tax deductions. Section 179, bonus depreciation, regular MACRS depreciation, and other provisions each have different eligibility requirements and potential tax implications. The largest immediate deduction is not necessarily the most beneficial approach for every business, particularly when considering current and future taxable income.
Final thoughts
If you’re planning to purchase equipment, vehicles, real estate, or other significant business assets, contact our Business Tax & Advisory team. We can help you understand the depreciation rules that may apply, evaluate available tax-saving opportunities, and determine how upcoming purchases may fit into your broader tax strategy.
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