How does depreciation work for equipment purchases?

Depreciation spreads the cost of business equipment across the years the equipment helps produce income, rather than deducting the full cost in the year of purchase. The IRS generally expects this treatment for equipment that lasts more than one year. The rules are mechanical, not mysterious: basis, class life, and the date the asset is placed in service drive the number. This article is general information, not tax advice for a specific situation.

What equipment can you depreciate, and what does it cost to get it running?
When does depreciation actually start?
What is MACRS, and which recovery period applies to your equipment?
How do you calculate depreciation with straight-line and declining balance?
Can you deduct equipment in full instead of depreciating it?
What happens if you never claimed depreciation you were entitled to?
How does Spencer Accounting handle depreciation and back filings for owners who are behind?
Key Takeaways
References

What equipment can you depreciate, and what does it cost to get it running?

Depreciable property must be owned by the business, used in a business or income-producing activity, have a determinable useful life, be expected to last more than one year, and not be excepted property, according to IRS Topic No. 704.

Land is never depreciable. The IRS also lists equipment used to build capital improvements and property placed in service and disposed of in the same year as excepted property.

The depreciable basis starts with the purchase price plus sales tax, delivery fees, and installation costs, minus any discounts or rebates, according to 1800Accountant. A company that paid $10,000 for used equipment, $2,000 to transport it, and $5,000 to get it working records the equipment at a cost of $17,000, as explained by AccountingCoach.

If equipment is used partly for personal purposes, only the business-use portion can be depreciated. The personal-use percentage is excluded from the depreciable basis.

When does depreciation actually start?

Depreciation begins when the asset is placed in service, meaning it is ready and available for its specific business use, not when it was ordered or paid for. The Bookkeeping and Accounting Inc. guide states this placed-in-service date drives the asset class, recovery period, and convention, so it changes the first-year deduction.

The placed-in-service date matters because it determines which tax year the depreciation begins in and which convention applies. IRS Form 4562 half-year and mid-quarter convention rules can change the first-year deduction based on when during the year the asset was placed in service.

Useful life is not the same as physical life. A computer may have a physical life of 10 years but a useful life of 3 years because of expected changes in software and hardware, according to AccountingCoach. The useful life is an estimate of how long the asset will serve the business, not how long it will physically function.

What is MACRS, and which recovery period applies to your equipment?

MACRS, the Modified Accelerated Cost Recovery System, is the default federal system for tangible business equipment placed in service after 1986. Property placed in service before 1987 generally uses ACRS, the Accelerated Cost Recovery System, according to IRS Topic No. 704.

Most business equipment falls into a 5-year or 7-year class under MACRS, according to TaxShark Inc.. Computers are 5-year property, while residential rental properties have a 27.5-year life, as noted by 1800Accountant.

MACRS depreciation depends on the asset class, recovery period, convention, and the date the property is placed in service, according to the Bookkeeping and Accounting Inc. guide. The half-year and mid-quarter conventions on IRS Form 4562 can change the first-year deduction depending on when during the year the asset was placed in service.

How do you calculate depreciation with straight-line and declining balance?

Straight-line depreciation spreads the depreciable base evenly over the asset's useful life. The formula is (cost basis minus salvage value) divided by useful life, according to 1800Accountant. A $70,000 truck expected to be used for seven years would be reported as $10,000 of expense in each of the seven years, as explained by AccountingCoach.

The depreciable cost is the asset's cost minus its estimated salvage value. Using a salvage value of $0 is common in the depreciation calculation, according to AccountingCoach.

Double-declining balance doubles the straight-line rate. For a $10,000 machine with a five-year life, the first year's depreciation is $4,000 under double-declining balance, according to 1800Accountant.

Businesses commonly use straight-line for internal books and MACRS for the tax return, according to the Bookkeeping and Accounting Inc. guide. The two methods serve different purposes: internal books reflect economic reality, while the tax return follows IRS rules.

Can you deduct equipment in full instead of depreciating it?

Yes, in several cases. Section 179 expensing allows qualifying equipment to be fully expensed in the purchase year, subject to an annual dollar limit and a phase-out above a purchase threshold. For 2024, the Section 179 deduction limit is $1,160,000, with phase-outs after about $2.89 million of purchases in a year, according to TaxShark Inc..

Bonus depreciation is not limited by business income or a specific dollar cap and can create a net loss. It is taken after any allowable Section 179 deduction and before any other depreciation, according to IRS Topic No. 704. Bonus depreciation was 60% in 2024 under its phase-down schedule, as noted by TaxShark Inc..

The de minimis safe harbor lets items costing $2,500 or less per item or per invoice item be deducted outright if the business has an accounting policy to expense small purchases, according to TaxShark Inc..

Dollar limits and bonus percentages shift year to year, so confirm the figures for the current tax year.

What happens if you never claimed depreciation you were entitled to?

Under the "allowed or allowable" rule, the IRS treats depreciation as claimed even if the business failed to claim it, which reduces basis on a later sale, according to TaxShark Inc.. The IRS generally requires business equipment lasting more than one year to be depreciated over time rather than expensed at purchase.

An equipment depreciation schedule records what was bought, when it was ready for business use, how it will be depreciated, and how its value declines over time, according to the Bookkeeping and Accounting Inc. guide.

A 2024 NFIB survey found over 25% of small business owners say they are unclear on depreciation rules for equipment, as reported by TaxShark Inc.. That uncertainty is common, and it is also costly when depreciation is missed or misapplied.

How does Spencer Accounting handle depreciation and back filings for owners who are behind?

Spencer Accounting Group works with owners who have outgrown DIY bookkeeping or are carrying unfiled returns, including catch-up work sequenced to reach compliance with the least disruption. Bookkeeping keeps clean monthly books year round so the numbers support depreciation decisions instead of being reconstructed in April.

Sales Tax Resolution covers nexus review, exposure quantification, voluntary disclosure, and getting current with each state for businesses selling across state lines. Multi-state sales tax nexus is a specialty, which matters for owners whose equipment purchases and sales activity cross state lines.

Strategic Tax Planning designs the tax position around where the business is heading, and Tax Filing handles business and individual returns through a secure portal from anywhere.

Spencer Accounting is 100% virtual, founded in 2013, and serves clients in any state or country with no office visit required. Book a consultation to see if it is a fit.

Key Takeaways

Depreciation spreads an asset's cost across its useful life instead of deducting the full cost in the purchase year.
To depreciate equipment, a business must own it, use it for business, expect it to last more than one year, and not hold excepted property.
Land is never depreciable, and the depreciable basis includes sales tax, delivery, and installation costs minus discounts or rebates.
Depreciation starts when the asset is placed in service and ready for its business use, not when it was purchased.
Straight-line is (cost basis minus salvage value) divided by useful life; double-declining balance doubles that rate.
Section 179, bonus depreciation, and the de minimis safe harbor can accelerate or replace depreciation, but their limits change year to year.
Under the allowed-or-allowable rule, the IRS treats depreciation as claimed even if it was never taken.