Depreciation
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life, allowing businesses and rental property owners to deduct the cost of assets as they wear out or become obsolete.
Exam Tip
MACRS: 5-year (computers, autos), 7-year (furniture, equipment), 27.5 years (residential rental), 39 years (commercial). Bonus depreciation: 40% in 2025. Half-year convention default; mid-quarter if >40% placed in service Q4.
What is Depreciation?
Depreciation allows businesses to recover the cost of tangible assets over their useful life through annual tax deductions. The Modified Accelerated Cost Recovery System (MACRS) is the primary method used for tax purposes.
MACRS Recovery Periods
| Asset Class | Recovery Period |
|---|---|
| Computers, autos | 5 years |
| Furniture, equipment | 7 years |
| Residential rental property | 27.5 years |
| Commercial property | 39 years |
Conventions and Special Rules
| Rule | Details |
|---|---|
| Half-year convention | Default; assumes asset placed in service mid-year |
| Mid-quarter convention | Required if >40% of assets placed in service in Q4 |
| Bonus depreciation (2025) | 40% first-year deduction |
| Section 179 | Expense full cost in year 1 (up to limit) |
Exam Alert
Know MACRS recovery periods: 5-year (computers/autos), 7-year (furniture), 27.5 years (residential rental), 39 years (commercial). Bonus depreciation is 40% in 2025 (phasing down). Half-year convention is the default; mid-quarter applies when >40% placed in service in Q4.
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