Depreciation and MACRS: 179, bonus, recovery

Depreciation lets a business deduct the cost of an asset over time instead of all at once. For US tax, three tools apply in a fixed order: the section 179 election, then the special depreciation allowance (bonus), then regular MACRS depreciation on whatever basis is left. The decision rule: pick the asset’s MACRS class first, then check whether 179 or bonus accelerates the deduction, and remember that any depreciation taken reduces basis and can come back as ordinary income on a sale. This guide uses tax year 2025 and IRS Publication 946 (2025) and the Instructions for Form 4562 (2025). Figures for other years differ. It is exam preparation, not tax advice.

The order: section 179, then bonus, then MACRS

Pub 946 describes the special depreciation allowance as an additional deduction taken after any section 179 deduction and before regular depreciation is figured. In practice:

1. Section 179 is an election to deduct the cost of qualifying property in the year it is placed in service. For property placed in service in tax years beginning in 2025 the maximum is $2,500,000, reduced dollar for dollar once the cost of 179 property placed in service exceeds $4,000,000. The deduction cannot exceed taxable income from the active conduct of any trade or business; the disallowed part carries to the next year. Property used for both business and personal purposes qualifies only if used more than 50% for business.
2. Special depreciation allowance (bonus) is 100% for qualified property acquired and placed in service after January 19, 2025 (Public Law 119-21). Property acquired before January 20, 2025 and placed in service in 2025 is limited to 40%. Unless the taxpayer elects out, bonus is mandatory, and the election out is made for a whole class of property. A taxpayer may instead elect 40% for the first tax year ending after January 19, 2025. Qualified property includes tangible property with a MACRS recovery period of 20 years or less, and it can be new or certain used property.
3. MACRS recovers the remaining basis over the recovery period.

Unlike bonus, which applies to a whole class of property unless the taxpayer elects out, 179 is allocated among items as the taxpayer chooses and is capped by business income. That contrast is the heart of the “depreciation versus 179 versus bonus” planning item on SEE Part 2.

Class, method and convention

Every MACRS asset has three attributes. The class sets the recovery period, the method sets the shape of the deductions, and the convention sets the first-year fraction.

Land is never depreciable. A taxpayer can elect straight line or 150% instead of 200% for the 3-, 5-, 7- and 10-year classes. Some property must use the Alternative Depreciation System (straight line over ADS recovery periods), including listed property used 50% or less in qualified business use, which also cannot take 179 or bonus.

Conventions. The half-year convention is the default: property is treated as placed in service at the midpoint of the year. The mid-quarter convention replaces it if the depreciable basis of property placed in service in the last three months is more than 40% of all MACRS property placed in service that year. For that test the basis is reduced by 179 but not by bonus, and nonresidential real and residential rental property are excluded. Buildings use mid-month: the first-year deduction depends on the month, counting half of the month placed in service.

A worked example for 2025

A business buys a $30,000 5-year machine in March 2025 (acquired after January 19). Compare three paths:

The rates are the half-year percentages that Pub 946 shows for 5-year property. Every path recovers the same $30,000 in total; only the timing differs.

Now the convention test. Suppose the business also bought a $70,000 5-year asset in November, no 179 or bonus on either. November property is 70% of the $100,000 total, above 40%, so the mid-quarter convention applies. The March asset is treated as placed in service at the middle of the first quarter (10.5 of 12 months) and the November asset at the middle of the fourth quarter (1.5 of 12 months). The first-year rate is 40% x 10.5/12 = 35% and 40% x 1.5/12 = 5%, giving $10,500 + $3,500 = $14,000, against $20,000 under half-year.

A building: Pub 946 shows 2.033% for the first year of 39-year property placed in service in March and 2.564% in later years. On a $400,000 building (land excluded) that is $8,132 in year one and $10,256 afterwards.

Recapture: depreciation comes back

Depreciation reduces adjusted basis (tax basis shows how). Gain on selling section 1245 property, which is mostly personal property, is ordinary income up to the depreciation allowed or allowable (Pub 544). Sell the machine above for $12,000 after expensing all of it: basis is zero, the $12,000 gain is ordinary. For section 1250 real property, the part of long-term gain due to depreciation is “unrecaptured section 1250 gain,” which has its own rate treatment on Schedule D (capital gains and losses covers the netting). A 179 deduction is also recaptured as ordinary income if business use falls to 50% or less during the recovery period. Dispositions are reported on Form 4797.

Which exams test this

How exam questions are built

• Order of operations. The question gives a cost and asks for the first-year deduction. Take 179 first, then bonus, then MACRS on the rest.
• The 40% test. Land and buildings are excluded, 179 is subtracted, bonus is not.
• Dates. Acquisition after January 19, 2025 decides 100% versus 40%, and the “elect out” wording decides whether the percentage applies.
• Business use. 50% or less means ADS, no 179 or bonus, and possible recapture. A passenger automobile also has annual dollar caps (section 280F); the Form 4562 instructions give $12,200 for a 2025 vehicle with no special allowance.
• Basis. Depreciation lowers basis even if it was never claimed (“allowed or allowable”), so a sale question asks for gain from adjusted basis.

The other side of the same cost is the Schedule C expense in Schedule C and self-employment tax.

Practice questions

Go deeper

• IRS Publication 946, How To Depreciate Property
• Instructions for Form 4562, Depreciation and Amortization
• IRS Publication 544, Sales and Other Dispositions of Assets
• Related on this site: tax basis, the SEE Part 2 cheat sheet and how to study for certification exams.