Business Depreciation Methods Compared: MACRS, Section 179, Bonus Depreciation, and Straight-Line
Depreciation is the tax mechanism for recovering the cost of business assets (equipment, vehicles, buildings, furniture) over their useful life. But the tax code provides several ways to depreciate assets, and the method chosen can dramatically affect the timing and size of deductions. Understanding the four main methods and when to use each one is fundamental to tax planning for any business that owns tangible assets.
Four depreciation methods:
1. Modified Accelerated Cost Recovery System (MACRS):
- The default depreciation method for most business assets
- Uses prescribed recovery periods: 5-year (computers, vehicles), 7-year (furniture, equipment), 15-year (land improvements), 27.5-year (residential rental), 39-year (commercial real estate)
- Uses accelerated methods: 200% declining balance for 3, 5, 7, and 10-year property; 150% declining balance for 15 and 20-year property; straight-line for 27.5 and 39-year property
- Half-year convention: assumes the asset was placed in service at the midpoint of the year (full-year deduction in year 2+, half-year in year 1 and the final year)
- Mid-quarter convention: if more than 40% of total asset purchases are placed in service in Q4, all assets use mid-quarter convention (reduces year-1 deduction for Q4 purchases)
2. Section 179 (IRC 179):
- Allows immediate expensing of the full cost of qualifying assets in the year placed in service
- 2024 limit: $2,500,000 (OBBBA raised this significantly; 2026 limit: $2,560,000)
- Phase-out: the $2,500,000 limit is reduced dollar-for-dollar when total qualifying purchases exceed $4,000,000 (2024)
- Cannot create or increase a business loss (limited to taxable income from the business)
- The taxpayer can choose which assets to expense and which to depreciate (flexibility in managing taxable income)
- Qualifying property: tangible personal property (equipment, vehicles, furniture), certain improvements to nonresidential real property (roofs, HVAC, fire suppression, security systems), off-the-shelf software
3. Bonus Depreciation:
- 100% bonus depreciation restored permanently by the One Big Beautiful Bill Act (OBBBA), retroactive
- Applies to new and used property with a recovery period of 20 years or less
- Automatic (unlike Section 179, which requires an election): the taxpayer must elect OUT of bonus depreciation, not into it
- CAN create or increase a net operating loss (unlike Section 179)
- No dollar limit (unlike Section 179’s $2,500,000 cap)
- Doesn’t require taxable income (unlike Section 179)
4. Straight-line depreciation:
- Evenly spreads the cost over the recovery period
- Required for: real property (27.5 and 39-year), ADS property, listed property with 50% or less business use
- Available by election for all property (taxpayer can elect straight-line over MACRS if they prefer smaller, even deductions)
- Useful when the business doesn’t need large first-year deductions (low-income year, NOL carryforward available)
When should each method be used?
Vehicle-specific rules and other limits to know
Luxury auto limits: Passenger vehicles under 6,000 lbs GVWR are subject to luxury auto depreciation caps regardless of method. The first-year maximum with bonus depreciation was $12,400 (2024); the remaining cost is depreciated over years 2-6 using MACRS. Vehicles over 6,000 lbs GVWR are not subject to this cap.
Standard mileage rate lock-out: Once a business depreciates a vehicle using MACRS or Section 179, it cannot switch to the standard mileage rate for that vehicle in a later year. Standard mileage first, then a later switch to actual expenses, is allowed. The reverse isn’t.
Excess business loss limitation: When bonus depreciation creates a loss large enough to offset a business owner’s other income (W-2 wages, investment income), the loss is still subject to the excess business loss limitation under IRC 461(l): $305,000 for single filers, higher for joint filers (2024, indexed annually). A loss within that threshold flows through normally. Anything above it’s carried forward as a net operating loss instead of offsetting current-year non-business income.
Self-employment tax: For a sole proprietor or single-member LLC, Section 179 and bonus depreciation both reduce net profit on Schedule C, which reduces the self-employment tax base along with income tax. The Section 179 deduction is still capped at taxable income from all of the taxpayer’s active trades or businesses combined, not just the one that bought the asset.
What happens when bonus depreciation phases out?
The 100% bonus depreciation rate under the Tax Cuts and Jobs Act applies to property placed in service before January 1, 2027. After that, the rate drops to 80% in 2027, 60% in 2028, 40% in 2029, 20% in 2030, and 0% in 2031 and beyond. The remaining cost not covered by bonus depreciation is recovered over the asset’s regular MACRS useful life (5 years for equipment, 7 years for office furniture, 39 years for commercial buildings). Businesses planning major asset purchases should consider accelerating those purchases into years with higher bonus depreciation rates. Section 179 remains available regardless of the bonus depreciation phaseout, subject to its own annual dollar limits.
Related guides:
- Bonus Depreciation vs. Section 179: Which Should Your Business Use?
- Depreciation Recapture When Selling Business Assets: Section 1245, 1250, and the Tax Bill at Sale
- Cost Segregation Study for Small Business Owners: Accelerating Building Depreciation
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Yarik Yarosh, CPA. "Business Depreciation Methods Compared: MACRS, Section 179, Bonus Depreciation, and Straight-Line." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-depreciation-methods-comparison
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.