Tax Depreciation Calculator

Related Calculators

External Resources

Frequently Asked Questions

What is tax depreciation?

Tax depreciation is the systematic allocation of the cost of tangible business assets (buildings, equipment, vehicles, machinery) over their useful life for tax purposes. It allows businesses to deduct the cost of assets over time rather than all at once.

What is the Modified Accelerated Cost Recovery System (MACRS)?

MACRS is the current US tax depreciation system. It specifies recovery periods (3, 5, 7, 10, 15, 20, 27.5, 39 years) and methods (200% declining balance, 150% declining balance, straight-line). Most tangible personal property uses 200% DB with a half-year convention.

What is Section 179 depreciation?

Section 179 allows businesses to deduct the full purchase price of qualifying equipment and software (up to $1,220,000 for 2024) in the year placed in service, rather than depreciating over time. The deduction phases out dollar-for-dollar when total asset purchases exceed $3,050,000.

What is bonus depreciation?

Bonus depreciation allows an additional first-year deduction on qualifying assets. For 2024, bonus depreciation is 80% of the asset cost (declining from 100% in 2022-2023, phasing down 20% per year through 2026). Bonus depreciation is available for new and used assets with a recovery period of 20 years or less.

What is the difference between tax depreciation and book depreciation?

Tax depreciation uses MACRS rules (faster write-offs, specific conventions). Book depreciation (GAAP) uses straight-line or other methods based on estimated useful life. The difference creates temporary timing differences (deferred tax assets/liabilities).

What is the half-year convention?

The half-year convention treats all property placed in service during the year as placed in service at mid-year. This means half a year of depreciation is allowed in the first year regardless of when the asset was actually placed in service.

What is the mid-quarter convention?

The mid-quarter convention applies when more than 40% of the total basis of all personal property placed in service during the year is placed in service during the last quarter. Assets are treated as placed in service at the mid-point of the quarter they were acquired.

What is the mid-month convention?

The mid-month convention applies to real property (buildings). Assets are treated as placed in service at the mid-point of the month. This means a building placed in service in March gets 10.5 months of depreciation for that year (half of March plus April-December).

What is the 200% declining balance method?

The 200% declining balance method (200% DB) is the default MACRS method for 3, 5, 7, and 10-year property. It doubles the straight-line rate and applies it to the declining balance. For 5-year property: 200%/5 = 40% per year of the remaining balance.

What is the 150% declining balance method?

The 150% declining balance method applies to 15 and 20-year property. The rate is 150%/life. For 15-year property: 150%/15 = 10% of remaining balance per year. This is a slower method than 200% DB but faster than straight-line.

What is the straight-line method for depreciation?

The straight-line method allocates the cost evenly over the asset's life. For 5-year property: 20% per year (100%/5). MACRS switches from declining balance to straight-line when straight-line yields a higher deduction.

What is the recovery period for different assets?

Common recovery periods: 3 years (tractors, breeding hogs), 5 years (cars, trucks, computers, office machinery), 7 years (office furniture, fixtures, most equipment), 10 years (water vessels, single-purpose ag structures), 15 years (land improvements, retail/restaurant improvements), 20 years (farm buildings), 27.5 years (residential rental), 39 years (nonresidential real estate).

How does vehicle depreciation work?

Vehicles are 5-year MACRS property but subject to luxury auto limits. For 2024, the maximum first-year depreciation (including bonus) is $20,400 (or $12,400 if no bonus). Passenger auto depreciation limits apply: $20,400 year 1, $19,800 year 2, $11,900 year 3, $7,160 year 4+.

What is listed property?

Listed property includes assets used for both business and personal purposes: cars, computers, cameras, and cell phones (after TCJA, cell phones are no longer listed property). Business use must exceed 50% to qualify for MACRS. If business use is = 50%, straight-line over ADS life applies.

What is the Alternative Depreciation System (ADS)?

ADS is a slower depreciation system with longer recovery periods and straight-line method. It is required for certain assets (listed property used = 50% for business, tax-exempt use property, certain foreign-use property). ADS may be elected voluntarily for AMT purposes.

How does real estate depreciation work?

Residential rental property: 27.5-year straight-line (3.636% per year). Nonresidential real estate: 39-year straight-line (2.564% per year). Both use mid-month convention. Land cannot be depreciated. The building cost must be separated from land cost.

What is the de minimis safe harbor?

The de minimis safe harbor allows businesses to deduct assets costing $2,500 or less per item (or $5,000 with applicable financial statements) as an immediate repair expense rather than capitalizing and depreciating. This simplifies accounting for small purchases.

What is the disposition of depreciable property?

When you sell or dispose of depreciable property, you must recognize gain or loss. Gain is the difference between selling price and adjusted basis (cost minus accumulated depreciation). Depreciation recapture (Section 1245) turns gain into ordinary income up to total depreciation taken.

What is Section 1245 depreciation recapture?

When personal property (equipment, vehicles) is sold at a gain, the gain up to the amount of depreciation claimed is recaptured as ordinary income (Section 1245 recapture). Any remaining gain is Section 1231 gain (capital gain treatment).

What is Section 1250 depreciation recapture?

Section 1250 recapture applies to real property (buildings). For residential and nonresidential real estate placed in service after 1986 (MACRS), there is no recapture of straight-line depreciation. Any gain is treated as Section 1231 gain. Unrecaptured Section 1250 gain is taxed at 25%.

What is the qualified improvement property (QIP)?

QIP includes interior improvements to nonresidential buildings placed in service after the building was placed in service. Under the CARES Act, QIP is 15-year MACRS property with 200% DB, eligible for bonus depreciation and Section 179.

How does cost segregation work?

Cost segregation is an engineering-based analysis that reclassifies building components (electrical, plumbing, flooring, lighting, landscaping) into shorter-lived asset classes (5, 7, 15 years) for faster depreciation. This significantly accelerates depreciation deductions.

What is the repair vs. capitalization standard?

Under the tangible property regulations, ordinary repairs that keep property in efficient operating condition are deductible expenses. Improvements that add value, extend useful life, or adapt to new use must be capitalized and depreciated. The distinction depends on facts and circumstances.

What is the vehicle standard mileage rate?

Instead of actual depreciation, you can use the standard mileage rate (67�/mi for 2024) to calculate vehicle expense. This rate includes depreciation, gas, oil, repairs, and insurance. If you use standard mileage, you switch to straight-line depreciation when you claim actual expenses.

What is the asset class life for MACRS?

The IRS assigns class lives and recovery periods for different asset types. Use IRS Publication 946 (How to Depreciate Property) to find the correct recovery period. Examples: computers = 5 years, office furniture = 7 years, gas station buildings = 15 years.

How does the luxury auto limit work?

Passenger automobiles are subject to annual depreciation limits (IRS Publication 463). For 2024: $20,400 year 1 (with bonus), $19,800 year 2, $11,900 year 3, $7,160 year 4+. Heavy vehicles (SUVs over 6,000 lbs GVWR) are not subject to these limits.

What is the Section 179 SUV limit?

Section 179 deduction for heavy SUVs (6,000-14,000 lbs GVWR) is limited to $30,900 for 2024. The remaining cost can be depreciated under MACRS with bonus depreciation. Light trucks/smaller vehicles are subject to luxury auto limits.

What is the MACRS convention for real estate?

Real estate uses the mid-month convention. For example, a residential rental building placed in service in March has 9.5 months of depreciation in year 1 (half of March + April-December). Year 2+ gets full 12 months. Final year gets the remaining half-month.

When does depreciation start and end?

Depreciation starts when the asset is "placed in service" (ready and available for use), not when purchased. Depreciation ends when the asset is fully depreciated (adjusted basis = salvage value) or disposed of. Partial year depreciation applies in the first and last years.