What's the difference between depreciation and amortization?
Depreciation applies to tangible assets (equipment, buildings, vehicles). Amortization applies to intangible assets (patents, copyrights, goodwill). Both spread cost over useful life, but use different terminology.
Can I depreciate land?
No. Land is not depreciable because it has an indefinite useful life and doesn't wear out or become obsolete. Only land improvements (parking lots, landscaping) can be depreciated.
What is salvage value?
Salvage (or residual) value is the estimated amount an asset will be worth at the end of its useful life. It's subtracted from cost to determine the depreciable amount. Many companies estimate zero salvage for simplicity.
Can I change depreciation methods?
Changing methods requires justification and may need IRS approval for tax purposes. For financial reporting, changes must be disclosed and may require restatement of prior periods under certain accounting standards.
Which depreciation method should I use?
Match the method to how the asset loses value. Straight-line fits buildings and assets used evenly across their life. Double declining fits vehicles, computers, and tech that lose most of their value early. Sum-of-years'-digits sits between the two. For US tax returns, MACRS is generally required for assets placed in service after 1986 — use the IRS tables in Publication 946 rather than a freeform method.
What's the difference between book and tax depreciation?
Book depreciation follows GAAP and aims to match expense with economic use over an asset's useful life; companies usually pick straight-line or units-of-production. Tax depreciation in the US follows the IRS's MACRS rules, which use prescribed recovery periods and accelerated methods regardless of actual economic life. The two will rarely match, so businesses keep separate schedules and reconcile the difference through deferred tax accounts.
When can I use Section 179?
Section 179 lets eligible businesses immediately expense the cost of qualifying tangible property (equipment, off-the-shelf software, qualified improvement property) in the year placed in service, instead of depreciating it over years. For 2024 the deduction limit is $1,160,000 with a $2,890,000 spending phase-out (limits adjust annually). The election is made on Form 4562 and is subject to a business taxable-income limit that cannot create a net operating loss.
What is bonus depreciation and how does it differ from Section 179?
Bonus depreciation (IRC Section 168(k)) is an additional first-year deduction for qualified property with a recovery period of 20 years or less. Unlike Section 179, it has no dollar cap, no taxable-income limit, and is taken before Section 179. The percentage is phasing down: 60% for property placed in service in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 unless Congress changes the law.
How does MACRS work?
MACRS assigns every depreciable asset to a recovery period (3, 5, 7, 10, 15, 20, 27.5, or 39 years) and applies a prescribed depreciation method (200% declining balance for most personal property, 150% for some 15- and 20-year property, straight-line for real property). The IRS publishes year-by-year percentage tables in Publication 946; you multiply the asset's depreciable basis by the table percentage for that recovery year. Conventions (half-year, mid-quarter, or mid-month) determine how the first and final years are prorated.
What is Section 1245 recapture when I sell a depreciated asset?
When you sell Section 1245 property (most depreciable personal property) for more than its adjusted basis, the gain up to the amount of prior depreciation is taxed as ordinary income — not capital gains. Only the portion of gain exceeding original cost qualifies for Section 1231 capital-gain treatment. Section 1250 has similar but more lenient rules for real property. Plan disposals carefully, because aggressive accelerated depreciation now can create a larger recapture bill on sale.
Why does my book value never hit zero with declining balance?
Declining-balance methods multiply book value by a fixed rate, which mathematically can only approach zero, never reach it. In practice you switch to straight-line over the remaining life in the year that gives a higher deduction, or you cap the final year so book value equals salvage. This calculator enforces the salvage floor for you, so the schedule lands cleanly at your salvage estimate.
Do I have to depreciate or can I just expense small assets?
The IRS de minimis safe harbor election under Reg. 1.263(a)-1(f) lets you expense items costing up to $2,500 each ($5,000 if you have an applicable financial statement) instead of capitalizing and depreciating them. You must have a written accounting policy in place at the start of the tax year and apply it consistently. Anything above the threshold or that materially extends an asset's life still has to be capitalized.
