Business Depreciation Explained: Straight-Line, MACRS, Section 179

Depreciation is one of those accounting concepts that small business owners either ignore entirely or apply incorrectly — and both approaches cost money. When you buy equipment, vehicles, or other long-lived business assets, you generally can't deduct the full cost in the year of purchase. Instead, you spread the deduction over the asset's useful life. Understanding how this works changes how you think about equipment purchases, taxes, and the actual profitability of your business.

Why Depreciation Exists

The logic is straightforward: if you buy a delivery van for $45,000 and use it for seven years, the economic cost isn't $45,000 in year one. The cost is spread across those seven years of use. Matching deductions to the periods when you actually benefit from the asset is the principle behind depreciation — and it's why your tax return and your checkbook tell different stories about your business's financial year.

In practice, depreciation creates a non-cash expense: you already paid for the asset, but you're still recording a cost each year that reduces your taxable income. This is why profitable businesses can sometimes show significant losses on paper — they're claiming depreciation on large assets they purchased in prior years.

Straight-Line Depreciation: The Simple Case

Straight-line depreciation spreads the cost evenly across the asset's useful life.

Annual Depreciation = (Purchase Price − Salvage Value) ÷ Useful Life in Years

Say you buy a commercial refrigerator for your restaurant for $12,000. You expect it to last 10 years, after which it has a salvage value of $1,000.

Annual Depreciation = ($12,000 − $1,000) ÷ 10 = $1,100 per year

Each year for 10 years, you deduct $1,100 from your business income. The asset's "book value" — what it's worth on your balance sheet — decreases by $1,100 annually, from $12,000 in year zero to $1,000 at the end of year 10.

The IRS assigns "useful life" categories to different asset types (called MACRS — Modified Accelerated Cost Recovery System). Equipment is typically 5 or 7 years. Residential rental property is 27.5 years. Commercial real estate is 39 years. Land is never depreciated.

MACRS: How the IRS Actually Calculates It

The IRS doesn't require most businesses to use straight-line depreciation. MACRS allows you to take larger deductions early in an asset's life — which is better for your cash flow and tax position.

Under the double-declining balance method (the most common MACRS approach), the annual depreciation rate is twice what it would be under straight-line, but applied to the remaining book value rather than the original cost.

For a 5-year asset (computers, cars, certain equipment): straight-line rate would be 20% per year (1 ÷ 5). Double-declining is 40%. But it's applied to the declining balance:

Year 1: 40% × $12,000 = $4,800 depreciation Year 2: 40% × ($12,000 − $4,800) = 40% × $7,200 = $2,880 Year 3: 40% × $4,320 = $1,728 ...and so on, switching to straight-line when that produces a larger deduction.

The IRS publishes MACRS percentage tables for every asset class that do this math for you — most tax software handles it automatically.

Section 179: Deducting the Full Cost in Year One

Section 179 of the tax code lets businesses deduct the full purchase price of qualifying equipment in the year it's placed in service, instead of depreciating it over multiple years. For 2024, the Section 179 deduction limit is $1,220,000, with a phase-out beginning at $3,050,000 in qualifying purchases.

This is enormously valuable for small businesses. Bought a $35,000 commercial oven? Instead of depreciating it over 7 years (~$5,000/year deduction), you deduct the full $35,000 in the year you put it to use. At a 25% effective tax rate, that's an $8,750 tax saving pulled forward from future years into the current year.

Qualifying assets include machinery, equipment, computers, office furniture, and most business vehicles (with limits for passenger vehicles). The asset must be used more than 50% for business purposes, and the deduction is limited to your business's taxable income for the year.

Bonus Depreciation: The Additional Tool

Bonus depreciation allows an additional percentage deduction on qualifying new and used property in the year of purchase, on top of regular MACRS. Under the 2017 Tax Cuts and Jobs Act, bonus depreciation was 100% through 2022 — meaning you could deduct 100% of qualifying property immediately. That percentage is now stepping down: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% after that unless Congress extends it.

Unlike Section 179, bonus depreciation can create a loss — meaning your business can deduct more than it earns in a given year. Section 179 cannot exceed net income. This makes bonus depreciation more powerful for businesses with large asset purchases in low-income years.

The Recapture Problem

One catch with accelerated depreciation: if you sell a depreciated asset for more than its current book value, you may owe "depreciation recapture" tax on the difference. The recaptured amount is taxed as ordinary income (not capital gains), which can be surprisingly high.

Bought and fully depreciated that $12,000 refrigerator under Section 179 (book value is now $0). Sell it five years later for $3,500. That $3,500 is fully taxable as ordinary income — because you already took the deduction. Planning around recapture is one reason business owners often donate or scrap old equipment rather than selling it.

Practical Takeaway

If you're a small business owner buying equipment: talk to your tax preparer before the purchase, not after. The decision between Section 179, bonus depreciation, and standard MACRS can shift thousands of dollars of tax benefit between years. The timing of a purchase (before or after year-end) can also matter — assets placed in service in December get a full year's deduction under most MACRS conventions. Getting this right is one of the few areas where proactive tax planning pays for itself quickly.