Bonus Depreciation

Bonus rental property depreciation: Your Accelerated Path to Tax Savings

Here's the opportunity many business owners miss: the IRS allows you to deduct 60% of the cost of qualifying business assets in a single year. Not spread across decades—immediately. For a small business that purchases $500,000 in equipment, that's $300,000 in first-year deductions. For someone in the 37% tax bracket, that translates to $111,000 in immediate tax savings.

Bottom Line: Bonus depreciation is one of the most powerful tax deductions available to business owners today. It accelerates the depreciation timeline dramatically, allowing you to recover your capital investment faster and reduce your tax liability in high-income years. However, the window is closing—the percentage deduction phase-down means acting strategically in 2026 captures 60% instead of waiting until 2026 when it drops to 20%.

Understanding Bonus Depreciation: Definition & Legal Framework

Bonus depreciation, codified under IRC Section 168(k), represents a departure from traditional depreciation methods. While normal depreciation spreads an asset's cost over its useful life (3 to 39+ years depending on asset type), bonus depreciation allows you to deduct a significant percentage of the asset's cost in the year it's purchased and placed in service.

How Bonus Depreciation Works

The process is straightforward: when you purchase qualifying property and place it in service for business use, you immediately deduct the bonus percentage (currently 60% in 2026) from that year's business income. The remaining balance is then depreciated normally over the asset's recovery period using the appropriate depreciation method (MACRS or another approved method).

Example: You purchase machinery for $100,000. With 60% bonus depreciation, you claim a $60,000 deduction in year one. The remaining $40,000 is depreciated over its 5-year MACRS recovery period, providing an additional $8,000 in depreciation each year for five years.

Historical Context & Tax Cuts and Jobs Act (TCJA)

Bonus depreciation isn't new. It was introduced in 2002 as a temporary stimulus measure and has undergone several iterations. The Tax Cuts and Jobs Act of 2017 dramatically expanded it, allowing 100% bonus depreciation for qualified property acquired after September 27, 2017, through December 31, 2022. This represented a significant advantage: you could deduct the entire cost immediately.

Starting January 1, 2023, the phase-down began:

• 2023: 80% bonus depreciation
• 2024: 60% bonus depreciation
• 2025: 40% bonus depreciation
• 2026: 20% bonus depreciation
• 2027 and beyond: 0% (complete phase-out)

Legal Framework & Qualification Requirements

Bonus depreciation is governed by IRC Section 168(k) and Treasury Regulations. To qualify, property must meet specific criteria: it must be tangible property with a recovery period of 20 years or less, and it must be either newly constructed or newly acquired. The rules changed significantly under TCJA—previously, used property didn't qualify, but now most used property acquired after September 27, 2017 does qualify for bonus depreciation.

Property Types Eligible:

• Machinery and equipment (business use)
• Vehicles (with business use percentage)
• Computers and software
• Qualified improvement property (improvements to commercial buildings)
• Certain manufacturing equipment
• Leasehold improvements (under specific conditions)

Who Benefits Most: Detailed Personas & Scenarios

Persona 1: The Small Manufacturing Business Owner (Rachel)

Profile: Rachel owns a precision manufacturing business generating $750,000 in annual revenue. She just decided to automate her production line and is investing $400,000 in new CNC machinery.

Scenario: Without bonus depreciation, Rachel could depreciate the machinery over 5 years, claiming $80,000 annually in depreciation. With 60% bonus depreciation, she claims $240,000 in year one (60% × $400,000), plus $32,000 in traditional depreciation on the remaining $160,000. Her immediate first-year deduction is $272,000 instead of $80,000—a difference of $192,000.

Tax Impact: At Rachel's 32% effective tax rate, this strategy saves her $61,440 in federal taxes in year one. She can reinvest this into business growth, pay down debt, or increase owner distributions. In a year where she might have faced a higher tax bill, bonus depreciation provides critical cash-flow relief.

Who This Benefits: Business owners making significant equipment purchases, manufacturers upgrading production capacity, service businesses investing in vehicles or tools.

Persona 2: The Real Estate Developer (Marcus)

Profile: Marcus is a commercial real estate developer who just completed $2.5M in improvements to a 50,000 sq ft office building he owns.

Scenario: Marcus's improvements include HVAC systems, flooring, electrical upgrades, and interior buildout. Previously, these would be depreciated over 39 years as real property. Under bonus depreciation (particularly with the expanded qualified improvement property rules), many of these improvements now qualify for 60% bonus depreciation if they meet specific requirements.

Tax Impact: If $1.5M qualifies for 60% bonus depreciation, Marcus claims $900,000 in year-one deductions. Combined with normal depreciation on the remainder, his total first-year deduction could exceed $1.2M—deductions that might otherwise have been spread across four decades. At Marcus's 37% marginal rate, this generates $333,000 in first-year tax savings, transforming his project's economics.

Who This Benefits: Real estate investors making building improvements, property developers completing buildout projects, commercial landlords upgrading facilities.

Persona 3: The Fleet-Based Business Owner (DeShawn)

Profile: DeShawn operates a logistics company with 40 delivery vehicles. He replaces 15 vehicles annually at an average cost of $45,000 per vehicle ($675,000 total).

Scenario: Each vehicle purchased for business use qualifies for bonus depreciation. At 60%, DeShawn claims $405,000 in bonus depreciation on this year's vehicle purchases. The remaining $270,000 is depreciated over 5 years (the recovery period for vehicles).

Tax Impact: First-year deductions of $459,000 (the $405,000 bonus plus $54,000 in traditional depreciation on the remaining balance). At DeShawn's 35% rate, this saves him $160,650 in year-one taxes. Over the next four years, he'll continue to depreciate the remaining balance, providing ongoing tax deductions.

Who This Benefits: Transportation companies, contractors with heavy equipment fleets, delivery services, rental businesses with equipment inventory.

Persona 4: The Specialty Trade Contractor (Jennifer)

Profile: Jennifer runs an electrical contracting business with $2.2M in annual revenue. She invests $180,000 in specialized testing equipment, diagnostic tools, and work vehicles.

Scenario: All of Jennifer's purchases qualify for bonus depreciation. The $180,000 investment generates $108,000 in immediate deductions (60% of $180,000), plus an additional $14,400 in year-one traditional depreciation on the remaining balance.

Tax Impact: At Jennifer's 37% bracket, this creates $45,168 in federal tax savings. Additionally, if Jennifer was expecting a higher-income year, bonus depreciation reduces her taxable income, potentially reducing her self-employment tax liability (15.3% on 92.35% of net earnings). The strategy could save her an additional $5,200 in self-employment taxes—total year-one tax savings of approximately $50,400.

Who This Benefits: Self-employed professionals, contractors, consultants, service providers making equipment investments.

Persona 5: The E-Commerce Business Owner (Amelia)

Profile: Amelia runs an e-commerce fulfillment business generating $3.8M in annual revenue. She's building a new warehouse and investing $520,000 in shelving, conveyor systems, packing equipment, and computer systems.

Scenario: Amelia's equipment purchases all qualify. However, her warehouse buildout includes structural improvements that might not qualify (or might qualify partially as qualified improvement property, depending on specifics). Of her $520,000 investment, approximately $420,000 qualifies for 60% bonus depreciation ($252,000 in immediate deductions) plus traditional depreciation.

Tax Impact: Year-one deductions exceed $300,000, generating $99,000+ in federal tax savings at her 33% effective rate. This is particularly valuable because Amelia can use these deductions to offset other W-2 business income or carry losses forward to reduce her federal tax liability in future years.

Who This Benefits: Growing businesses making capital investments, companies scaling operations, businesses making facility improvements.

Step-by-Step Implementation: Timeline & Detailed Process

Step 1: Determine Eligibility & Plan Your Asset Purchases (Timeline: Now to End of Year)

Action Items:

• Identify all assets you plan to purchase or have purchased in the current year
• Verify that each asset qualifies: is it tangible property with a recovery period of 20 years or less?
• Determine the recovery period for each asset (3-year, 5-year, 7-year, 15-year, or 20-year property)
• Calculate the business-use percentage for vehicles and mixed-use property
• Document the purchase date and in-service date for each asset

Critical Requirement: The asset must be placed in service during the tax year. "Placed in service" typically means the asset is ready to use for its intended purpose. Simply purchasing it isn't enough—the equipment must actually be installed, tested, and operational.

Step 2: Consult with a Tax Professional (Timeline: Before Year-End Purchase)

Action Items:

• Meet with a CPA or tax attorney who specializes in depreciation strategies
• Review your income projections for the year—bonus depreciation works best when you have substantial income to offset
• Discuss entity structure: are you operating as a sole proprietorship, S-Corporation strategy, C-Corp, or LLC?
• Address passive loss limitations if applicable (real estate professionals have special rules)
• Plan for alternative minimum tax (AMT) implications if relevant
• Discuss Section 179 deduction as an alternative or complement to bonus depreciation

Pro Tip: Don't wait until after year-end to consult a professional. Planning beforehand allows you to optimize your purchases and structure transactions strategically.

Step 3: Make Strategic Asset Purchases (Timeline: Throughout the Year)

Action Items:

• Complete your asset purchases with clear purchase documentation (invoices, receipts, bills of sale)
• For used property, document that it qualifies under current rules (acquired after Sept 27, 2017)
• Maintain all vendor receipts and payment evidence
• For real property improvements, get detailed invoices breaking down labor and materials
• For vehicles, document business-use percentage (maintain mileage logs)
• Retain certificates of installation, completion dates, and operational status documentation

Critical Documents Needed:

• Original purchase invoices with item descriptions and individual pricing
• Proof of payment (checks, credit card statements, bank transfers)
• Shipping receipts and delivery documentation
• Installation completion dates and proof of in-service placement
• For vehicles: documentation of business vs. personal use allocation
• For real property: architectural plans, contractor quotes, and final invoices

Step 4: Calculate Your Deduction (Timeline: Tax Preparation)

Action Items:

• Create a detailed asset listing with: description, cost, date acquired, date placed in service, recovery period, bonus percentage, calculated deduction
• Calculate bonus depreciation: Asset Cost × Applicable Percentage (60% for 2026)
• Calculate remaining depreciable basis: Asset Cost - Bonus Deduction
• Calculate first-year traditional depreciation on the remaining basis using appropriate MACRS tables
• Determine if you're electing Section 179 deductions (which reduces eligible bonus depreciation)
• Calculate total year-one deductions from all sources

Example Calculation:

• Equipment Cost: $100,000
• Bonus Depreciation (60%): $60,000
• Remaining Basis: $40,000
• Recovery Period: 5 years
• MACRS Year 1 Rate: 20%
• Traditional Depreciation: $40,000 × 20% = $8,000
• Total Year 1 Deduction: $60,000 + $8,000 = $68,000

Step 5: Report on Your Tax Return (Timeline: Tax Return Preparation)

Action Items:

• File Form 4562 (Depreciation and Amortization) reporting all assets
• Document bonus depreciation election (it's automatic unless you affirmatively decline)
• Report total depreciation on your tax return (Schedule C for self-employed, corporate return for businesses)
• Keep supporting depreciation schedules with your tax records
• If amending a prior return, file Form 3115 for accounting method changes (if required)

Step 6: Maintain Documentation & Plan Ahead (Timeline: Ongoing)

Action Items:

• Retain all original purchase documentation for the asset's entire life (and beyond)
• Update your depreciation schedule annually showing beginning and ending balances
• Track when remaining basis is fully depreciated (typically 5-7 years after initial purchase)
• Plan for gain/loss calculations when you ultimately dispose of the asset
• Review next year's phase-down rate and plan future purchases accordingly

Timeline & Deadlines

Key Deadlines:

• Throughout the Year: Assets must be purchased AND placed in service
• December 31: Assets must be in-service by year-end to qualify for that tax year
• Tax Return Filing: Bonus depreciation is claimed on the original return (typically April 15 for individuals, extended to June 15 for some)
• Amended Returns: If you miss bonus depreciation, you can amend back 3 years

Common Pitfalls & Recovery Strategies

• Pitfall 1: Assets Not Placed in Service - An asset isn't eligible if purchased but not yet operational. Solution: Ensure installation is complete and equipment is functional before year-end. Get dated completion certificates.
• Pitfall 2: Mixing Personal & Business Use Without Documentation - Vehicles used partially personally must have business-use percentage documented. Solution: Maintain detailed mileage logs and contemporaneous records.
• Pitfall 3: Overstating Qualified Improvement Property - Not all building improvements qualify. Solution: Have a tax professional review real property improvements before claiming them.
• Pitfall 4: Asset Recovery Period Miscalculation - Getting the MACRS recovery period wrong affects remaining basis depreciation. Solution: Verify recovery periods using IRS Publication 946.
• Pitfall 5: Forgetting the Used Property Rules - Used property acquired before Sept 27, 2017 doesn't qualify. Solution: Document acquisition dates and verify qualification before claiming.

Real Numbers: Tax Savings Calculations & Scenarios

Scenario 1: Small Business Equipment Purchase

Business Profile: Sarah owns a veterinary clinic with $650,000 in annual gross revenue. She's purchasing new diagnostic equipment and upgraded surgical instruments totaling $85,000.

Item	Amount
Equipment Cost	$85,000
Bonus Depreciation (60%)	$51,000
Remaining Basis	$34,000
Year 1 MACRS Depreciation (20%)	$6,800
Total Year 1 Deduction	$57,800

Tax Calculation (32% marginal rate):

• Tax Savings from Bonus Depreciation: $51,000 × 32% = $16,320
• Tax Savings from Year 1 Traditional Depreciation: $6,800 × 32% = $2,176
• Total Year 1 Tax Savings: $18,496

5-Year Projection:

Year	Depreciation	Tax Savings (32%)
Year 1	$57,800	$18,496
Year 2	$13,600	$4,352
Year 3	$8,160	$2,611
Year 4	$4,900	$1,568
Year 5	$2,440	$781
Total	$85,000	$27,808

Key Insight: Notice how 68% of the tax benefits ($18,496 of $27,808) arrive in year one. This front-loading is the primary advantage—you get the cash-flow benefit immediately rather than spread across five years.

Scenario 2: Commercial Real Estate with Qualified Improvement Property

Business Profile: A property owner completes $1.2M in improvements to a 30,000 sq ft office building. The improvements include: flooring ($280K), electrical upgrades ($320K), HVAC installation ($320K), and interior partitioning ($280K). All improvements meet qualified improvement property (QIP) requirements.

Improvement Type	Cost
Flooring	$280,000
Electrical Upgrades	$320,000
HVAC Installation	$320,000
Interior Partitioning	$280,000
Total	$1,200,000

Without Bonus Depreciation (Pre-2018 Rules)

All $1.2M would be depreciated over 39 years using straight-line method: $30,769/year in depreciation. Annual tax savings at 37% rate = $11,385.

With 60% Bonus Depreciation (2026)

Component	Amount
Total Qualified Improvement Cost	$1,200,000
Bonus Depreciation (60%)	$720,000
Remaining Basis	$480,000
Year 1 Straight-Line Depreciation (1/39)	$12,308
Total Year 1 Deduction	$732,308

Tax Impact (37% marginal rate):

• Year 1 Tax Savings: $732,308 × 37% = $271,054
• Traditional Depreciation (39 years): $12,308 × 37% = $4,554/year going forward
• Year 1 Tax Savings vs. Traditional Depreciation: $271,054 vs. $11,385 = $259,669 accelerated benefit

Phase-Down Impact: The Time-Sensitive Window

The same $1.2M investment yields different deductions depending on when purchased:

Year	Bonus Rate	Bonus Depreciation	Tax Savings (37%)
2024	60%	$720,000	$266,400
2025	40%	$480,000	$177,600
2026	20%	$240,000	$88,800
2027+	0%	$0	$0

Key Insight: Purchasing in 2024 vs. 2026 saves an additional $177,600 in year-one tax deductions. Delaying until 2027 results in losing the benefit entirely (absent Congressional extension).

Expert Strategies: Advanced Implementation Techniques

Strategy 1: Synchronizing Bonus Depreciation with Business Expansion

Overview: Rather than purchasing assets reactively, strategic business owners plan major capital purchases specifically for years when they anticipate high income.

Implementation: Consider a consulting business that receives a $500,000 multi-year contract. The owner could accelerate equipment purchases to the high-income year, using bonus depreciation to offset the income spike. If the contract payment comes in year 1, bundle equipment purchases in year 1 to maximize deductions against that income.

Example: Contract payment year: $500,000 gross (before expenses). Expected bonus depreciation deductions: $150,000. This reduces taxable income to $350,000 instead of $500,000, saving approximately $18,500 in federal taxes (at 37% rate) plus state taxes and self-employment taxes on the differential.

Strategy 2: Leveraging the Qualified Improvement Property (QIP) Rules

Overview: The Tax Cuts and Jobs Act expanded qualified improvement property—improvements to the interior of commercial buildings now qualify for bonus depreciation if they meet specific requirements.

Qualifying Improvements: Flooring, wall/ceiling coverings, electrical installations, plumbing, HVAC systems, fire protection systems, and security systems all qualify if they're improvements to the building's interior (not the structure itself).

Implementation: When renovating commercial property, structure the project to separately invoice systems that qualify as QIP. Get your contractor to provide itemized invoices that break out QIP-eligible items. This documentation is critical if audited.

Documentation Tips:

• Request detailed invoices separating QIP items from structural improvements
• Have the contractor provide material lists showing HVAC, electrical, plumbing specifications
• Document that improvements are to the building's interior, not structural components
• Keep photos showing before/after conditions
• Maintain records showing these are improvements, not replacements of the original structure

Strategy 3: cost segregation study Studies for Maximum Deductions

Overview: A cost segregation study breaks down the cost of real property improvements into components with different recovery periods—accelerating depreciation deductions dramatically.

How It Complements Bonus Depreciation: Where bonus depreciation captures 60% of qualified property in year one, cost segregation recategorizes assets to shorter recovery periods. Many components identified in cost segregation studies qualify for 5-year or 7-year depreciation instead of 39-year real property depreciation.

Combined Strategy Example: A $3M building renovation combines bonus depreciation and cost segregation:

• $1.2M in qualified improvement property: 60% bonus depreciation = $720,000 year-one deduction
• $800K in components with 5-year recovery (identified via cost segregation): 60% bonus = $480,000 year-one deduction
• $1M in structural improvements: Depreciated over 39 years = $25,641 year-one deduction
• Total Year 1 Deduction: $1,225,641 (vs. $76,923 without strategies)

When to Use: Cost segregation studies make sense for projects exceeding $1M in capital improvements, typically taking 8-12 weeks to complete (cost: $15,000-$50,000 depending on complexity). The deduction acceleration typically justifies the cost.

Strategy 4: Timing Vehicle Purchases to Maximize Business-Use Percentage

Overview: Vehicles purchased for mixed personal/business use only get bonus depreciation on the business-use portion.

Implementation: If you have multiple vehicles and plan to transition one from personal to business use, purchase it during the tax year when you'll use it primarily for business. Document your business-use percentage with detailed mileage logs.

Example: You purchase a $50,000 truck with 80% business use (documented via mileage logs): $50,000 × 80% × 60% bonus = $24,000 year-one deduction. If you had claimed only 50% business use, the deduction would be only $15,000—proper documentation is worth $2,664 in immediate tax savings (at 37% rate).

Strategy 5: Electing Out of Bonus Depreciation for Passive Loss Situations

Overview: Most taxpayers want maximum bonus depreciation, but passive loss limitations can make it less valuable. You can elect to claim less bonus depreciation (or none) if your income situation warrants it.

When This Applies: If you're a real estate professional or have substantial passive losses carryforward, creating additional deductions might not provide an immediate benefit if passive loss limitations prevent their use. Additionally, if you have net operating losses (NOLs) from prior years that are expiring, deferring deductions might be preferable to creating additional NOLs.

Implementation: Consult with your tax advisor before making purchases. If bonus depreciation won't benefit your current tax situation, you can make an election (on Form 4562) to opt out of bonus depreciation and simply claim traditional depreciation instead.

Strategy 6: Section 179 Deduction Coordination

Overview: Section 179 allows up to $1,160,000 (2026) in qualifying property cost to be deducted immediately (without the phase-down limits). You can strategically combine Section 179 and bonus depreciation.

Coordination Example: You have $2M in qualifying equipment purchases:

• Elect Section 179 on the first $1,160,000: Full $1,160,000 deduction (before limitations)
• Apply bonus depreciation to remaining $840,000: $840,000 × 60% = $504,000 deduction
• Total Deduction: $1,664,000

When to Use: Section 179 is most valuable when you have lower business income (it phases out at $4.6M in 2026 equipment purchases). Bonus depreciation is more valuable with higher income and multiple asset purchases. Coordinate based on your specific situation.

Common Mistakes: Avoid These Critical Errors

Mistake 1: Claiming Bonus Depreciation on Assets Not Yet Placed in Service

The Error: Claiming depreciation deductions for equipment that's been purchased but not yet installed or operational.

Example: You purchase $200,000 in manufacturing equipment on December 15th and claim bonus depreciation on your tax return. However, the equipment doesn't arrive at your facility until January 15th (next tax year) and isn't operational until February.

Consequence: The IRS disallows the deduction, you owe back taxes plus penalties and interest, and you must amend your return. The deduction becomes valid in the following year, but you've lost the timing advantage.

Recovery: Ensure equipment is fully installed, tested, and operational before year-end. Get written completion certificates from contractors. If you purchased equipment late in the year and it won't be placed in service by year-end, delay the purchase until the next year when it will be operational within the same tax year. Alternatively, request an extension of the placed-in-service deadline if available under IRS rules.

Mistake 2: Misclassifying Used Property as Qualified

The Error: Using used property that was acquired before September 27, 2017 and claiming it qualifies for bonus depreciation.

Background: Under pre-TCJA rules, only newly constructed property qualified for bonus depreciation. TCJA changed this for property acquired after Sept 27, 2017. But used property acquired before that date doesn't qualify—and this is a frequent audit target.

Example: You purchase used machinery for $150,000 that was manufactured in 2015 and claim 60% bonus depreciation ($90,000). You document that you purchased it in 2026, but you don't verify the acquisition date of the previous owner. If the IRS discovers the previous owner acquired it before Sept 27, 2017, the bonus depreciation is disallowed.

Recovery: Before claiming bonus depreciation on used property, request documentation from the seller proving their acquisition date. Keep this in your files. If you've already claimed it, you can amend your return to disallow the bonus depreciation and claim only straight-line depreciation on the remaining basis. The longer you wait to correct it, the more interest accrues.

Mistake 3: Inadequate Documentation for Business-Use Percentage

The Error: Claiming business-use depreciation on vehicles without supporting mileage logs or contemporaneous records.

Example: You purchase a $60,000 vehicle and claim 100% business use for depreciation purposes, but you actually use it 70% for business and 30% for personal use. You don't maintain mileage logs or detailed records.

Consequence: If audited, the IRS typically assumes minimal business use (sometimes even disallowing the deduction entirely) due to lack of documentation. You lose the deduction or must defend it with reconstructed records that are less credible.

Recovery: Maintain a mileage log from the date you place the vehicle in service. Record the date, business purpose, and miles driven for each trip. Use your contemporaneous records (calendar, appointment books, client files) to corroborate the business-use percentage. If you failed to keep logs, reconstruct your best estimate with supporting documentation and amend your return.

Mistake 4: Overstating Qualified Improvement Property Eligibility

The Error: Claiming structural improvements or building envelope components as qualified improvement property.

Example: You renovate a building's roof, windows, and foundation, calling all of it "qualified improvement property" to get 60% bonus depreciation. However, the IRS clearly states that the building's structural components (roof, foundation, building envelope) don't qualify—only interior systems do.

Consequence: The IRS disallows the bonus depreciation, requires you to depreciate these items over 39 years instead, and assesses penalties for claiming an incorrect deduction.

Recovery: Have your tax advisor or cost segregation analyst specifically review what qualifies as QIP before claiming it. Focus on interior systems: HVAC, electrical, plumbing, flooring, wall coverings, fire protection. Exclude structural components. If you've already claimed it incorrectly, file an amended return distinguishing between QIP (60% bonus) and structural improvements (39-year depreciation).

Mistake 5: Forgetting About the Section 163(j) Limitation on Business Interest

The Error: Creating large depreciation deductions that generate losses, which then trigger business interest limitations.

Context: Section 163(j) limits the business interest deduction to 30% of adjusted taxable income. If your depreciation deductions create a loss, your ability to claim interest deductions in future years may be limited.

Example: Your business has $800,000 in income and $700,000 in bonus depreciation deductions. You generate a $100,000 loss. If you also have $400,000 in business debt interest, only $240,000 (30% of adjusted income) is deductible. The remaining $160,000 carries forward indefinitely or expires after 5 years depending on when it's incurred.

Recovery: Before claiming large depreciation deductions, project your taxable income and interest limitations. Consider whether deferring some depreciation might produce better overall tax results. Coordinate with your CPA to manage interest deduction limitations strategically.

Mistake 6: Failure to Recapture Depreciation Upon Sale

The Error: Forgetting to account for depreciation recapture when you later sell the asset.

Context: Any depreciation deductions you claim must be "recaptured" as ordinary income when you sell the asset. Depreciation recapture is taxed at up to 25% (higher than capital gains rates for many taxpayers).

Example: Five years ago, you purchased equipment for $100,000 and claimed $60,000 in bonus depreciation plus $24,000 in additional depreciation. Your adjusted basis is now $16,000. You sell it for $50,000. You have a $34,000 gain ($50,000 sale price - $16,000 adjusted basis). The entire gain is ordinary depreciation recapture and is taxed at your ordinary income rate (up to 37%), not favorable capital gains rates.

Recovery: When claiming depreciation deductions, factor in the eventual depreciation recapture. It doesn't make the deduction bad—you still get the time value of money benefit—but it's important to understand the tax on disposition. Keep detailed depreciation records so you can accurately calculate adjusted basis when selling assets.

Bonus Depreciation vs. Alternatives: Comparison & Strategy

Bonus Depreciation vs. Section 179 Deduction

Both accelerate depreciation, but they work differently:

Feature	Bonus Depreciation	Section 179
2026 Limit	60% of cost (no dollar cap)	$1,160,000 total
Phase-Out Threshold	Scheduled (100% to 0% by 2027)	$4,600,000 acquisitions (begins phase-out)
Property Types	Tangible property, 20-year recovery or less	Business property, equipment, some vehicles
Income Limitation	None (creates NOL if needed)	Limited to current-year income (excess carries forward)
Depreciation After	40% of cost over remaining recovery period	None (fully deducted in year one)

Strategic Selection: Use Section 179 for lower-income businesses buying under $1.16M in equipment. Use bonus depreciation for higher-income businesses, those buying more than Section 179 limits, or when you want the flexibility of still depreciating the remaining basis. Many successful strategies combine both.

Bonus Depreciation vs. Regular MACRS Depreciation

Aspect	Bonus Depreciation	Regular Depreciation
Year 1 Deduction (5-year property, $100K)	$60,000 (60%)	$20,000 (20% MACRS)
5-Year Total Deduction	$100,000	$100,000
Tax Benefit Timing	60% immediate, front-loaded	Spread evenly over recovery period
NPV Advantage	Significant (time value of money)	None (same total, different timing)

Key Difference: Regular depreciation doesn't go away—you deduct 100% of the asset cost eventually. Bonus depreciation simply accelerates the deduction timing. This timing benefit generates real tax savings through the time value of money.

Tools, Resources & Professional Services

IRS Publications & Official Guidance

• Publication 946: How to Depreciate Property - Official IRS guidance on all depreciation methods, recovery periods, and bonus depreciation rules. Available free at IRS.gov
• Form 4562: Depreciation and Amortization - The official tax form for reporting all depreciation, including bonus depreciation elections
• Instructions for Form 4562: Detailed guidance on completing the form and calculating deductions
• IRS Section 168(k): The statutory authority for bonus depreciation in the Internal Revenue Code

Professional Services

• Tax Accounting Software: TaxAct, H&R Block At Home, TurboTax Self-Employed (for self-preparers); professional versions for tax preparers
• Depreciation Tracking Software: UltimateTax, ReadySoft Depreciation, or specialized modules in accounting software like QuickBooks, Intuit Lacerte
• Cost Segregation Specialists: For major real property projects (over $1M), firms like Stoneridge Group, Cagenix, or local CPA firms offer cost segregation studies (15-20 week process, costs $15K-$50K)
• CPA/Tax Attorney Consultation: Specialized depreciation CPAs or tax attorneys typically charge $300-$500/hour for planning and review

IRS MACRS Tables & Recovery Periods

Recovery periods vary by asset type:

• 3-year property: Special manufacturing equipment, certain tools
• 5-year property: Computers, office equipment, vehicles (most common)
• 7-year property: Office furniture, manufacturing equipment, agricultural machinery
• 15-year property: Certain improvements, qualified leasehold property
• 20-year property: Farm buildings, municipal sewers
• 27.5-year property: Residential rental property (not qualifying property for bonus depreciation)
• 39-year property: Commercial real property (unless qualified improvement property)

Online Calculators & Planning Tools

• IRS Publication 946 MACRS tables (available on IRS.gov) - Use to calculate year-by-year depreciation
• Online bonus depreciation calculators - Search "bonus depreciation calculator" to compare scenarios
• Business deduction tracking spreadsheets - Create your own or download templates to track assets and depreciation

Frequently Asked Questions