How to Calculate Depreciation for Tax Purposes
Depreciation allows businesses to deduct the cost of tangible assets over their useful life rather than all at once. The IRS provides four primary methods: MACRS (the default for most tax returns), straight-line, Section 179 immediate expensing, and bonus depreciation. For 2024, the Section 179 deduction limit is $1,220,000, and bonus depreciation lets you deduct 60% of the remaining cost in the first year.
The most common method on federal tax returns is MACRS, which uses IRS percentage tables based on the asset's recovery period. A computer or vehicle typically falls into the 5-year class, office furniture into the 7-year class, and commercial real estate into the 39-year class.
MACRS Depreciation
Under MACRS (Modified Accelerated Cost Recovery System), you multiply the asset's cost basis by the IRS percentage for each year. A $100,000 asset on a 5-year MACRS schedule depreciates as follows: Year 1 = 20% ($20,000), Year 2 = 32% ($32,000), Year 3 = 19.2% ($19,200), Year 4 = 11.52% ($11,520), Year 5 = 11.52% ($11,520), Year 6 = 5.76% ($5,760). The half-year convention means the asset is treated as placed in service at the midpoint of the first year, which is why the schedule spans six years instead of five.
Straight-Line Depreciation
The simplest method: (Cost - Salvage Value) / Useful Life. A $50,000 machine with a $5,000 salvage value and 10-year life depreciates at $4,500 per year. This method is common for financial reporting and for assets where MACRS is not applicable.
Section 179 and Bonus Depreciation
Section 179 lets you deduct up to $1,220,000of qualifying equipment and software in the year it's placed in service (2024 limit). This begins to phase out when total equipment purchases exceed $3,050,000. Bonus depreciation then applies to the remaining basis at 60% for 2024 (down from 80% in 2023). You can combine both: take Section 179 first, then bonus depreciation on the leftover amount, then depreciate any remaining balance using MACRS.
For example, if your business buys a $200,000 piece of equipment in 2024, you could expense the entire $200,000 under Section 179 (well within the $1,220,000 limit). If you choose to expense only $100,000 under Section 179, the remaining $100,000 basis qualifies for 60% bonus depreciation ($60,000), leaving $40,000 to depreciate over the MACRS recovery period.
Try It Yourself
Use our free depreciation calculator to compute MACRS, straight-line, Section 179, and bonus depreciation schedules for any asset.
Open Depreciation CalculatorFrequently Asked Questions
What is the difference between MACRS and straight-line depreciation?
MACRS (Modified Accelerated Cost Recovery System) front-loads deductions using IRS percentage tables, giving you larger write-offs in the early years. Straight-line spreads the cost evenly over the useful life. MACRS is required for most business assets on your federal tax return, while straight-line is commonly used for book (financial reporting) purposes. For example, a $50,000 asset on a 5-year MACRS schedule deducts 20% ($10,000) in year one, whereas straight-line would deduct $10,000 each year for five years.
Can I use Section 179 and bonus depreciation together?
Yes. You apply Section 179 first, up to the $1,220,000 limit for 2024, then apply bonus depreciation (60% for 2024) to the remaining depreciable basis. For instance, if you purchase $1,500,000 in qualifying equipment, you could take $1,220,000 under Section 179, then apply 60% bonus depreciation to the remaining $280,000 ($168,000), and depreciate the leftover $112,000 using MACRS over the recovery period.
What assets qualify for MACRS depreciation?
Most tangible personal property used in a trade or business qualifies for MACRS, including vehicles, machinery, computers, office furniture, and equipment. Real property uses MACRS too: residential rental property depreciates over 27.5 years and nonresidential (commercial) property over 39 years. Land is never depreciable. The asset must have a determinable useful life of more than one year.
How is bonus depreciation changing after 2024?
Bonus depreciation is being phased down by 20 percentage points per year. It was 100% through 2022, dropped to 80% in 2023, 60% in 2024, and will continue to 40% in 2025, 20% in 2026, and 0% from 2027 onward (unless Congress extends it). This phase-down makes Section 179 increasingly important for first-year expensing.