Accounting
Depreciation
The systematic expensing of a long-lived asset's cost over its useful life. The mechanism that turns a large equipment purchase into a series of P&L deductions matched to the years the asset produces value.
Depreciation matches the cost of a fixed asset (equipment, vehicles, buildings) with the periods that benefit from its use. Common methods: straight-line (equal each year) and accelerated (more in early years).
Tax depreciation often differs from book depreciation. Section 179 expensing and bonus depreciation allow immediate or accelerated deduction for many small business assets.
Book (GAAP) depreciation typically uses straight-line over the asset's estimated useful life — 5 years for computers, 7 for most equipment, 39 for commercial real estate. Tax depreciation uses MACRS (Modified Accelerated Cost Recovery System) with statutory recovery periods and typically the 200% declining-balance method for personal property. The two calculations produce a Schedule M-1 timing difference that must be tracked separately, forever, until the asset is fully depreciated or disposed of.
Bonus depreciation and §179 expensing are the two levers that let owners front-load the deduction. Bonus depreciation went through a phase-down (80% 2023, 60% 2024, 40% early 2025) but the OBBBA restored 100% bonus depreciation for property acquired and placed in service after January 19, 2025, permanently. §179 lets a business immediately expense up to $2.56M (2026, indexed) of qualifying property with a phase-out beginning at $4.09M of spend. Below the thresholds both are elective — for a business with a large loss, deferring some depreciation preserves the deduction for a higher-bracket future year.
Cost segregation is the strategy that unlocks accelerated depreciation on real estate. A commercial building bought for $2M gets 39-year straight-line depreciation by default. A cost-segregation study breaks the building into components (personal property 5-7 years, land improvements 15 years, structural 39 years), moving typically 20-30% of the basis into faster-depreciating categories. The first-year deduction can jump by $200k-$400k on that same $2M building. Worth commissioning for any commercial-property purchase above roughly $500k in basis.
Recapture is the sting on disposal. Depreciation taken on an asset comes back as ordinary-income recapture when the asset is sold, up to the depreciation amount. §1250 recapture (real property) is capped at 25%; §1245 recapture (personal property) is at ordinary rates. Every dollar of §179 or bonus depreciation on equipment that's later sold gets recaptured — depreciation is a timing benefit, not a permanent one.
Common pitfalls
- Forgetting to track book / tax depreciation as separate timing schedules; the Schedule M-1 reconciliation is a common exam finding when it's missing
- Skipping a cost-segregation study on a $500k+ commercial-property purchase; the first-year deduction typically pays for the study 5-10× over
- Assuming the pre-OBBBA phase-down still applies; 100% bonus was restored for property acquired and placed in service after January 19, 2025
- Ignoring depreciation recapture on a planned equipment sale; the tax bill on disposal can eliminate the earlier deduction benefit
- Applying §179 to real property improvements without checking which categories qualify (roofs, HVAC, security systems yes; core building structure no)
Related service
See tax and CPA servicesHave a Depreciation situation in your business?
Monthly close, accrual-basis financials, and a ledger that holds up when a lender, a buyer, or an examiner asks to see it.