Tax Depreciation – Section 179 Deduction and MACRS

Depreciation is the amount you can deduct annually to recover the cost or other basis of business property. This must be for property with a useful life of more than one year. You can depreciate tangible property but not land.

Tangible property includes:

• Buildings
• Machinery
• Vehicles
• Furniture
• Equipment

You can also depreciate the cost of improving tangible property. The improvement must:

• Add to the value of the property
• Significantly lengthen the time the property can be used
• Adapt the property to a different use

However, you’ll need to deduct the cost of repairs to keep the property in operating condition. You can’t depreciate the property for this reason.

Depreciating property

You can use the modified accelerated cost recovery system (MACRS) to depreciate. Use this for the property you place in service after 1986. Under MACRS, these three conventions determine when property is placed in service:

Half-year convention — In most cases, the half-year convention is used for personal property. Personal property includes machinery, furniture, and equipment. Under the half-year convention, a half-year of depreciation is allowed in the first year of depreciation. This applies regardless of when you actually placed the asset in service.

Mid-quarter convention — You’ll use the mid-quarter convention instead of the half-year convention if both of these apply:

• More than 40% of the assets were placed in service during the tax year.
• Those 40% of assets were placed in service in the last three months of the year.

Under the mid-quarter convention:

• Property is considered placed in service at the midpoint of a quarter. This is true regardless of when it was actually placed in service during the quarter.
• You’ll be allowed to claim more or less than a half year’s depreciation. This depends on which quarter of the year the property was placed in service.

Mid-month convention — Real property (Ex: buildings) is depreciated under the mid-month convention. The property is considered placed in service at the midpoint of the month. This applies regardless of the actual date it was placed in service.

Section 179 deduction

Under Section 179, you can claim a deduction in the current year. You’d do this by deducting all or a portion of the cost of certain property as opposed to depreciating it.

You can claim the Section 179 deduction when you placed these types of property into service during the tax year:

• Qualified tangible personal property
• Qualified real property expenditures, which include:
  • Qualified leasehold improvement property
  • Qualified restaurant property
  • Qualified retail improvement property

Qualified tangible personal property

For 2023, you can write off up to $500,000 of the cost of qualified tangible personal property. This deduction might be phased out dollar-for-dollar if you place $2 million or more of qualified tangible personal property into service in the year.

Property that qualifies for the Section 179 deduction includes:

• Tangible personal property, like:
  • Machinery
  • Equipment
  • Automobiles
  • Computers
• Certain research and storage facilities
• Single-purpose agricultural structures
• Off-the-shelf computer software

Limitations on Section 179 deduction

Your maximum Section 179 deduction can’t be more than the taxable income you get from the active conduct of the trade or business. So, you must carry over any excess Section 179 deduction. You’ll do this until there’s sufficient business income to allow the Section 179 deduction.

You might also be subject to the income limitation and have both types of expenses. If so, the 2023 deduction is allocated pro rata between each expense.

Increased depreciation deduction

Businesses located in these areas might qualify for an increased depreciation deduction:

• Enterprise zone placed in service before Jan. 1, 2012
• Renewal communities
• New York Liberty Zone placed in service before Jan. 1, 2010

These properties might also qualify for a special depreciation allowance:

• Certain property with a long production period
• Qualified Liberty Zone property placed in service before Jan. 1, 2010
• Qualified GO Zone property placed in service before Dec. 31, 2011

Depreciation rules for listed property

Special depreciation rules apply to listed property. Listed property includes:

• Passenger automobiles and other property used for transportation. It excludes vehicles that aren’t likely to be used for personal purposes due to their nature or design, like:
  • Emergency vehicles
  • Large trucks
  • Buses
  • Other special-duty vehicles
• Property usually used for entertainment, recreation, or amusement — if it can’t be used exclusively at a regular place of business. This includes these kinds of equipment:
  • Photographic
  • Communication
  • Video-recording
• Computers not used exclusively at a regular place of business

Cell phones aren’t listed property. You can deduct or depreciate cell phones under the regular rules for business property. You don’t need detailed documentation on usage.

You must use your listed property continuously for more than 50% of the time for business purposes. If you don’t, you can’t claim a Section 179 deduction. Instead, you must depreciate the property using the alternative depreciation system (ADS). The straight-line method is used under ADS.

To learn more, see Publication 946: How to Depreciate Property at www.irs.gov.