Depreciation (MACRS) and the Section 179 deduction

When you buy assets to use in your business that are expected to last more than a year, you generally can't deduct the full cost in the year of purchase. Instead, you recover the cost over several years through depreciation.

To depreciate an asset it must: be owned by you, be used in your business or to produce income, have a determinable useful life (it wears out or loses value), and not be excluded property like land or inventory (never depreciated).

1. The MACRS system

The Modified Accelerated Cost Recovery System (MACRS) is the mandatory method for most business and investment property placed in service after 1986. The cost is recovered over a recovery period based on the asset class:

• 5-year property: passenger autos, trucks, vans, computers and peripherals, copiers.
• 7-year property: office furniture and fixtures (desks, safes, file cabinets).
• 39-year property: nonresidential real estate (commercial buildings), straight-line.

MACRS lets you choose a method depending on your strategy:

• Declining balance (200% or 150%): bigger deductions in the early years; automatically switches to straight-line when that gives an equal or larger deduction.
• Straight-line: equal deductions across the recovery period.

2. The Section 179 deduction

Instead of recovering the cost gradually, Section 179 lets you deduct all or part of the cost in the same year the asset is placed in service.

3. Business-use and recapture rules

4. Combining Section 179 and MACRS

You can use both on the same asset —for example, Section 179 on part of the cost and MACRS on the rest. The rule: first subtract the Section 179 deduction from the asset's cost; the resulting adjusted basis is what you depreciate under MACRS.