EA Part 2 Depreciation: MACRS, Section 179, and Bonus Depreciation Rules

Depreciation questions are reliable fixtures on Part 2 of the SEE. They appear as standalone questions, and they are embedded in entity-level questions about S-corps, partnerships, and sole proprietors. A taxpayer who places a single asset in service can trigger issues involving recovery period, convention, first-year bonus or Section 179 expensing, and recapture on disposition — all in one transaction. Knowing each layer builds the speed and accuracy you need on exam day.

MACRS Asset Classes and Recovery Periods

The Modified Accelerated Cost Recovery System (MACRS) assigns every depreciable business asset to a recovery class. The most frequently tested classes are:

• 5-year property: Automobiles, light trucks, computers, office equipment, and certain qualifying manufacturing equipment. Uses 200% declining balance switching to straight-line.
• 7-year property: Office furniture, fixtures, most machinery and equipment not assigned elsewhere. The default class for equipment when no other class fits. Uses 200% declining balance switching to straight-line.
• 15-year property: Land improvements (sidewalks, fences, landscaping), qualified improvement property (QIP) placed in service after 2017. Uses 150% declining balance switching to straight-line.
• 27.5-year property: Residential rental property (apartments, single-family rentals). Uses straight-line over 27.5 years.
• 39-year property: Nonresidential real property (commercial buildings, offices). Uses straight-line over 39 years.

MACRS depreciation percentages come from IRS tables built on these rates and conventions. Candidates are expected to know the recovery periods and understand how to apply table percentages, not to calculate depreciation mathematically from scratch.

Depreciation Conventions

Conventions determine how much depreciation is allowed in the first and last year of an asset's life:

Half-Year Convention: Applies to all personal property (5-year, 7-year, etc.) unless the mid-quarter convention kicks in. Treats all assets placed in service during the year as placed in service at the midpoint of the year, resulting in a half-year of depreciation in year one and a half-year in the final year.

Mid-Quarter Convention: Applies when more than 40% of all depreciable personal property placed in service during the year is placed in service in the last quarter. When triggered, each asset is treated as placed in service at the midpoint of the quarter in which it was actually placed in service. This convention can significantly reduce first-year depreciation for assets placed in service in the fourth quarter.

Mid-Month Convention: Applies to all real property (residential and nonresidential). Treats property as placed in service at the midpoint of the month it was actually placed in service.

Section 179 Expensing

Section 179 allows businesses to immediately expense the cost of qualifying property rather than depreciating it over the recovery period. Key numbers for recent tax years:

• Deduction limit: $1,160,000 (2023 figure; adjusts for inflation annually — know the current-year amount when you test)
• Phase-out threshold: The deduction phases out dollar-for-dollar when total qualifying property placed in service exceeds $2,890,000 (2023). A business placing $3,890,000 of property in service gets no Section 179 deduction.
• Taxable income limitation: Section 179 cannot create a loss. The deduction is limited to the aggregate taxable income from the active conduct of business. Unused amounts carry forward indefinitely.

Section 179 applies to tangible personal property, off-the-shelf software, and qualifying real property (qualified improvement property, qualified restaurant property, etc.). It does not apply to property held for investment.

For pass-through entities, Section 179 elections are made at the entity level but the limitation is applied at the partner or shareholder level.

Bonus Depreciation

The Tax Cuts and Jobs Act established 100% first-year bonus depreciation for qualifying property placed in service after September 27, 2017, and before January 1, 2023. After that, the percentage phases down:

• 2023: 80%
• 2024: 60%
• 2025: 40%
• 2026: 20%
• 2027 and beyond: 0% (absent new legislation)

Bonus depreciation applies to new and used qualifying property, which distinguished it from prior law that covered only new property. It applies automatically unless the taxpayer elects out for a given asset class. Unlike Section 179, bonus depreciation can create a loss and is not limited by taxable income.

Qualified property for bonus depreciation purposes includes property with a recovery period of 20 years or less, water utility property, computer software, and qualified film/TV/live theatrical productions.

Listed Property Limitations

Listed property — passenger automobiles, SUVs, and property used for transportation — is subject to additional first-year deduction limits. For passenger automobiles, the IRS sets annual luxury auto limits (sometimes called "luxury car caps") that cap total MACRS, Section 179, and bonus depreciation. These limits apply even if the car is used 100% for business. Unrecovered cost carries forward past the normal recovery period.

If listed property is used 50% or less for business, the taxpayer must use straight-line depreciation under ADS (the Alternative Depreciation System) rather than MACRS, and Section 179 and bonus depreciation are not available for that asset.

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