What Is Tax Depreciation? Writing Off Business Assets

Tax depreciation is how a US business recovers the cost of property it uses for more than a year, such as equipment and furniture, through yearly deductions instead of deducting the full cost at once. IRS Publication 946 (2025) says: "Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property." The IRS system for spreading the cost is MACRS. Two rules can move more of the cost into the first year: the Section 179 deduction and the special depreciation allowance, also known as bonus depreciation. Ask your accountant which applies to your purchases.

Billed publishes this page. It's general information about US federal tax, not tax advice. The IRS quotes come from Publication 946 (2025), How To Depreciate Property, which says it's "For use in preparing 2025 Returns" (last reviewed April 30, 2026), and the IRS About Form 4562 page (last reviewed October 21, 2026), both opened on October 30, 2026. State rules can differ from federal rules.

What can be depreciated (US)

Publication 946 (2025) says: "To be depreciable, the property must meet all the following requirements." The requirements are:

• "It must be property you own."
• "It must be used in your business or income-producing activity."
• "It must have a determinable useful life."
• "It must be expected to last more than 1 year."

On land, it says: "You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up."

MACRS (US)

Publication 946 (2025) says: "You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most property." Under MACRS, each type of property has a recovery period. For example, the publication lists "Office furniture and fixtures (such as desks, files, and safes)" as 7-year property.

A convention sets how much of the first year counts. For the half-year convention, the publication says: "Use this convention if neither the mid-quarter convention nor the mid-month convention applies."

Section 179 limits for 2025 and 2026 (US)

Publication 946 (2025) explains "how you can elect to take a section 179 deduction, instead of depreciation deductions, for certain property". On the dollar limits, it says:

• 2025: "For tax years beginning in 2025, the maximum section 179 expense deduction is $2,500,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $4,000,000."
• 2026: "For tax years beginning in 2026, the maximum section 179 expense deduction is $2,560,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $4,090,000."

There's also an income limit: "The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year."

The special depreciation allowance (US, 2025)

Publication 946 (2025) says: "Unless you elect out, you must take a 100% special depreciation allowance for certain qualified property (including long production period property and certain aircraft) acquired and placed in service after January 19, 2025."

For property acquired earlier, it says: "The special depreciation allowance is limited to 40% for certain qualified property acquired after September 27, 2017, and placed in service after December 31, 2024, and before January 1, 2026 (other than certain property with a long production period and certain aircraft)."

Qualified property includes "Tangible property depreciated under MACRS with a recovery period of 20 years or less." The publication also says: "Qualified property can be either new property or certain used property."

Form 4562 (US)

The IRS About Form 4562 page says to use the form to:

• "Claim your deduction for depreciation and amortization."
• "Make the election under section 179 to expense certain property."

Sample: a $6,000 furniture purchase (tax year 2025)

The figures here are a sample for the 2025 tax year. A sole proprietor on a calendar tax year buys office desks and chairs for $6,000 and places them in service on September 2, 2025. They're used only for business, they're the only property placed in service that year, and the sample assumes they're qualified property. Office furniture is 7-year property.

1. With the 100% special depreciation allowance: $6,000 × 100% = $6,000 for 2025.
2. If the business elects out and doesn't elect Section 179: regular MACRS applies. Publication 946's own example for 7-year property under the half-year convention uses "14.29% (0.1429)" for the first year. $6,000 × 14.29% = $857.40 for 2025, and the rest of the cost is recovered in later years.
3. Section 179 instead: the $6,000 cost is far below the 2025 limit of $2,500,000, but the deduction is still limited by the business's taxable income.

Nothing in the sample is placed in service in the last 3 months of the year, and furniture isn't real property, so the sample uses the half-year convention. Publication 946 says the mid-quarter convention applies when "the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year" (with some exclusions) "are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year." Which treatment fits a real business depends on its income and plans. Ask your accountant before you choose.

Selling depreciated property (US)

Depreciation affects the tax when you sell. Publication 946 (2025) says: "When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable." For how gains on business assets are taxed, see what is capital gains tax.

Where Billed fits

Depreciation starts from what you paid and when. Billed's expenses and receipts page says: "Attach the receipt when you record the expense, and it stays with that entry in your Billed account instead of in a drawer or an inbox." It also says: "Reports can be filtered by date range and exported for your accountant, bookkeeper or tax software."

Related Articles

• What Is Capital Gains Tax? Basics for Business Owners
• What Is a Tax Write-Off? Deductions vs Credits vs Refunds
• Tax Deduction vs Tax Credit
• Guide to Business Tax Deductions for Small Businesses

Frequently Asked Questions

What is tax depreciation?

IRS Publication 946 (2025) says: "Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property."

What is the Section 179 limit for 2025?

IRS Publication 946 (2025) says: "For tax years beginning in 2025, the maximum section 179 expense deduction is $2,500,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $4,000,000."

What is the Section 179 limit for 2026?

IRS Publication 946 (2025) says: "For tax years beginning in 2026, the maximum section 179 expense deduction is $2,560,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $4,090,000."

What is bonus depreciation in 2025?

The IRS calls it the special depreciation allowance. Publication 946 (2025) says: "Unless you elect out, you must take a 100% special depreciation allowance for certain qualified property (including long production period property and certain aircraft) acquired and placed in service after January 19, 2025." Ask your accountant whether your property qualifies.

Can I depreciate land?

IRS Publication 946 (2025) says: "You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up."