Depreciation on Business Property

Depreciation generally applies to property used in a business or income-producing activity that has a determinable useful life extending beyond the year. Land is not depreciable. Separate land from a building, and distinguish an asset purchase from a currently deductible expense. Use the applicable depreciable basis, including eligible acquisition costs, with any business-use allocation or special conversion rule.

Property is placed in service when it is ready and available for its intended use, not necessarily when paid for or ordered. Equipment delivered in December but not ready for use until January can have a different first depreciation year. Record both acquisition and service dates because the 2025 bonus-depreciation rules can depend on both. Identify listed property, vehicles and other special categories before applying a general equipment example.

The ordinary sequence is an elected section 179 deduction, the applicable special depreciation allowance, then regular depreciation on the remaining basis. Section 179 has property-eligibility, dollar, phase-out and business-income limits. For tax years beginning in 2025, the general maximum is $2,500,000, reduced when qualifying property placed in service exceeds $4,000,000. Vehicle and other special limits can be lower.

For certain qualifying property acquired and placed in service after January 19, 2025, the 2025 law restored 100% bonus depreciation. Property acquired before January 20 can remain subject to the prior phase-down rules, including a 40% rate for ordinary qualifying property placed in service in 2025. Elections and transition conditions matter. Do not use either 40% or 100% for every 2025 purchase solely from the year printed in the question.

For regular MACRS, determine the property class, GDS or ADS system, method and convention before selecting a table percentage. Five-year property under GDS 200% declining balance with a half-year convention commonly has a 20% first-year table rate. That rate already incorporates the half-year convention; halving it again would understate the deduction. Residential rental and nonresidential real property generally use straight-line methods with a mid-month convention.

The mid-quarter convention can apply when more than 40% of the relevant aggregate basis of covered property is placed in service in the last three months of the tax year, after applying the rule’s exclusions and adjustments. Do not default to half-year treatment before checking that test. Track depreciation allowed or allowable because it generally reduces adjusted basis and can affect later gain and recapture. The first-year deduction is one stage of the asset’s tax history.