MACRS, Section 179, and Bonus Depreciation
When a business purchases a long-lived asset — equipment, vehicles, machinery, furniture, computers — the cost cannot be deducted immediately as a current-year expense (except in certain elective situations). Instead, it must be capitalized and deducted over the asset's "useful life" according to IRS depreciation schedules. The Modified Accelerated Cost Recovery System (MACRS) is the US system for determining how quickly different asset classes can be depreciated. Common recovery periods: computers (5 years), office furniture (7 years), land improvements (15 years), commercial real estate (39 years), residential rental property (27.5 years). MACRS uses accelerated depreciation methods (double-declining balance for most personal property classes) that front-load deductions into earlier years.
Section 179 expensing allows businesses to deduct the full cost of qualifying assets in the year of purchase, up to an annual limit ($1,160,000 in 2023, with the deduction phasing out when total purchases exceed $2,890,000). This transforms what would be a multi-year depreciation deduction into a current-year expense. Qualifying assets include most business personal property (equipment, machinery, computers, vehicles), off-the-shelf software, and certain improvements to nonresidential real property (qualified improvement property, HVAC, roofing, etc.). Section 179 cannot create a net loss — the deduction is limited to taxable business income.
Bonus depreciation (Section 168(k)) allows an additional first-year deduction for qualifying property, historically at 100% of cost. Under the Tax Cuts and Jobs Act, bonus depreciation was 100% through 2022 and is phasing down (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026) before scheduled expiration. Unlike Section 179, bonus depreciation can create a net operating loss. Planning asset purchases around bonus depreciation phase-down timelines can meaningfully affect the timing of deductions.