Depreciation Methods

Tax accounting methods of depreciation that allow a deduction in excess of a current year's decline in economic value are accelerated cost recovery (ACR) methods.

• Property subject to the allowance for depreciation is tangible property that is used in trade or business or is held for production of income and that has a determinable, limited useful life.
  • The amount of a current depreciation deduction is computed by applying a rate to depreciable basis (DB).
    • The rate is determined under a mandatory or elected depreciation method.
    • The basis of property is decreased by the greater of the amount of depreciation allowed or allowable.
      • Allowable depreciation is the amount that a taxpayer is entitled to deduct under any proper method.
      • Allowed depreciation is the deduction claimed on the tax return.
• Depreciation of property begins in the taxable year that it is placed in service.
  • Property is considered placed in service when it is ready and available for a specific use.
• added 2026 De minimis safe harbor. Instead of capitalizing and depreciating, a taxpayer may elect to expense items costing up to $2,500 per item or invoice ($5,000 with an applicable financial statement). The election is made annually by statement attached to the return (Reg. 1.263(a)-1(f)).

Straight-Line Depreciation (S-L)

• The annual amount allowable is the depreciable basis reduced for salvage value (SV) and divided by the useful life of the asset.

(Basis – SV) ÷ Useful life

150% Declining Balance

• Basis (not reduced by SV) minus previously allowable deductions, which is adjusted basis (AB), is multiplied by 1 1/2 times the straight-line rate.

AB × (150% ÷ Useful life)

200% Declining Balance

• The constant rate is twice the straight-line rate.

AB × (200% ÷ Useful life)

MACRS

• The Modified Accelerated Cost Recovery System (MACRS) applies to property placed in service in 1987 or later.
  • MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Generally, GDS must be used unless the taxpayer is specifically required by law to use ADS or the taxpayer elects to use ADS.
  • The IRS has established and published percentage tables in Publication 946 to help taxpayers figure their depreciation deduction under MACRS. The percentage tables are based on the depreciation method, recovery period, placed in service date, and convention. Percentages are applied to the unadjusted basis of the property each year.
  • The 200%-declining-balance method is used for GDS recovery periods of 3, 5, 7, and 10 years; 150% is used for 15 and 20 year property.

Conventions

• added 2026 Half-year convention is the default for personal property: a half year of depreciation in the year placed in service and in the year of disposition, regardless of the actual date.
• added 2026 Mid-quarter convention is required if more than 40% of the depreciable basis of personal property placed in service during the year is placed in service in the last three months. Each asset is treated as placed in service at the midpoint of its quarter.
• added 2026 Mid-month convention applies to residential rental and nonresidential real property: a half month in the month placed in service and in the month of disposition.

Residential Rental Property

• The straight-line rate is based on a 27 1/2-year recovery period. It is real property with at least 80% of gross rents coming from dwelling units. Partial use by the owner is included. Transient use of more than half the units excludes the property, e.g., a motel.
• Nonresidential real estate is assigned a 39-year recovery period.
• added 2026 Qualified improvement property (QIP) is any improvement to the interior of a nonresidential building placed in service after the building was first placed in service, other than enlargements, elevators and escalators, or the internal structural framework. QIP is 15-year property (20-year under ADS), so it is eligible for bonus depreciation and for Sec. 179 as qualified real property.

Alternative Depreciation System (ADS)

• GDS is mandatory unless ADS is required or elected. ADS uses a straight-line rate based on longer recovery periods. Salvage value is ignored. Examples of ADS recovery periods are presented in the following table:

• ADS is required for each of the following:
  • Listed property used 50% or less for business
  • Property used, leased, or financed by tax-exempt organizations
  • Tangible property used predominantly outside the U.S.
  • Imported property from a country that engages in discriminatory trade practices
  • added 2026 Residential rental and nonresidential real property of an electing real property trade or business (a business that elects out of the Sec. 163(j) interest limitation), and property of an electing farming business with a recovery period of 10 years or more.

Listed Property and Automobiles

• Recapture income may result from modified use. Timing of capital recovery is even more specifically regulated in the case of luxury automobiles.

Passenger Automobiles

• Specific depreciation limitations apply to passenger automobiles that cost more than a base amount.
  • Passenger automobiles are generally four-wheeled, made for use on public roads, rated at 6,000 pounds gross vehicle weight or less, not used to transport for compensation, and not otherwise exempt.
  • Deduction, otherwise allowable, is limited to the business-use percentage of the dollar limitation amount applicable with reference to the year placed in service.
  • The lease of a car for business use is deductible, subject to the lease inclusion amount (Rev. Proc. tables) for cars with a fair market value over $62,000 for leases beginning in 2026. updated 2026

Listed Property

• Depreciation of listed property is limited by reference to qualified business use (QBU). Listed property includes the following:
  • Passenger automobiles,
  • Other transportation vehicles (e.g., truck rated 6,000 pounds or less),
  • Entertainment or recreational property (e.g., video camera), and
  • Any other property of a type specified by the Secretary by regulations.
  • added 2026 Computers and peripheral equipment are no longer listed property (removed for property placed in service after 2017).

Qualified Business Use (QBU)

• Rules for QBU include the following:
  • Use by an employee of his or her own property is QBU only if it is in the employer's trade or business, for the convenience of the employer, and required as a condition of employment (it enables proper performance of duties).
  • If QBU exceeds 50% in the tax year in which listed property is placed in service, Sec. 179 current expensing and MACRS depreciation are allowable with respect to the QBU portion.
  • If QBU is not more than 50% during the year in which listed property is placed in service, Sec. 179 expense election is not allowable and ADS depreciation is used (S-L over the class-life).
  • When QBU exceeds 50% in the first year but not in a subsequent year, the taxpayer must recapture as gross income any excess of depreciation allowed over ADS depreciation for prior year(s).

    Note. ADS depreciation is used for all years once QBU does not exceed 50% for any year.

Section 280F

• Section 280F allows an additional first-year depreciation (bonus depreciation) amount of $8,000 for passenger automobiles. The $8,000 add-on is permanent now that 100% bonus depreciation is permanent. updated 2026
  • For passenger automobiles placed in service during 2026, and for which the additional first-year depreciation deduction under Sec. 168(k) is not claimed, the maximum amount of allowable depreciation is updated 2026
    • $12,300 for the year in which the vehicle is placed in service ($20,300 if bonus depreciation is claimed),
    • $19,800 for the second year,
    • $11,900 for the third year, and
    • $7,160 for the fourth and later years in the recovery period.
  • For 2025 the limits were $12,200 ($20,200 with bonus), $19,600, $11,800, and $7,060. updated 2026
  • The capital recovery deductions include the amount expensed under Sec. 179 and depreciation.
  • The limitations are indexed for inflation each year (Rev. Proc. 2026-15 for 2026).
  • For vehicles rated 6,000 pounds or less, each year a passenger automobile is depreciated, the deduction is limited to the lesser of
    • The Sec. 280F limitation or
    • The depreciation that would have been computed under Sec. 168.
  • added 2026 SUVs, trucks and vans rated over 6,000 pounds GVWR are not subject to the Sec. 280F caps, but the Sec. 179 deduction for such a vehicle is capped at $32,000 for 2026 ($31,300 for 2025). Bonus depreciation is not capped. See Section 179.

Private reference, not client advice. Original notes written 2022–2023 while studying for the SEE Part 2; figures updated October 2026 (Rev. Proc. 2025-32, Rev. Proc. 2026-15, P.L. 119-21). Verify current-year amounts before relying on them.