Depreciation, Basis and Dispositions

Cost recovery for business property in 2025, including the section 179 and bonus depreciation changes made by the One Big Beautiful Bill Act, MACRS classes and conventions, listed property and auto limits, amortization, repair rules, and what happens on sale: sections 1245, 1250 and 1231, involuntary conversions and like-kind exchanges. Expect several table-based computations.

Business Tax Preparation5 min read7 sections

Must-know for the exam

The 2025 section 179 limit is $2,500,000, reduced by property placed in service over $4,000,000; the SUV cap is $31,300 (IRC 179(b); P.L. 119-21; Pub. 946 (2025)).
Bonus depreciation is 100% for property acquired after January 19, 2025 (40% may be elected); earlier acquisitions placed in service in 2025 get 40% (IRC 168(k); Pub. 946 (2025)).
Section 179 is limited to active business taxable income with an indefinite carryforward; bonus has no income limit (IRC 179(b)(3)).
MACRS lives: computers and cars 5 years, office furniture 7, land improvements 15, residential rental 27.5, nonresidential real property 39 (IRC 168(c); Pub. 946 (2025)).
Mid-quarter convention applies when over 40% of the year's personal property basis is placed in service in the last quarter (IRC 168(d)(3)).
Passenger auto first-year limit for 2025 is $20,200 with bonus or $12,200 without, times business use (IRC 280F(a); Pub. 946 (2025)).
Listed property used 50% or less for business must switch to ADS and recapture excess prior depreciation (IRC 280F(b)).
Section 197 intangibles such as purchased goodwill are amortized over 180 months from the month acquired (IRC 197(a)).
Section 1245 recaptures the smaller of depreciation or gain as ordinary; straight-line real property gain up to depreciation is unrecaptured 1250 gain taxed at up to 25% (IRC 1245, 1(h)(6)).
Net section 1231 gain is long-term capital gain except to the extent of net 1231 losses in the prior 5 years (IRC 1231(c); Pub. 544 (2025)).

On this page · 7 sections

Traps that cost marks

Using the pre-OBBBA 2025 figure or the 2024 limit.
Applying the 40% phase-down rate to property acquired after January 19, 2025.
Using section 179 to create a loss as bonus depreciation can.
Treating furniture like computers as 5-year property.
Using the residential 27.5-year life for commercial buildings.
Using a trigger other than more than 40% of the year's depreciable basis.
Continuing accelerated depreciation after business use falls to 50% or less.
Treating purchased goodwill as nondeductible.

Why it matters on the exam

Depreciation questions combine three decisions: how much to expense up front (section 179 or bonus), how to recover the rest (MACRS class and convention), and how to characterize gain on sale (recapture and section 1231). The 2025 law changes are central: a much larger section 179 limit and permanent 100% bonus for property acquired after January 19, 2025.

Land is never depreciated; allocate purchase price between land and building first (Treas. Reg. 1.167(a)-2).

Expensing: section 179 and bonus

Feature	Section 179 (2025)	Bonus depreciation (2025)
Amount	$2,500,000, less property over $4,000,000	100% if acquired after January 19, 2025; 40% if acquired earlier
Income limit	Active business income; excess carries forward	None; can create a loss
Election	Elect per property	Automatic unless electing out (or electing 40% for the first year ending after January 19, 2025)
SUV	Capped at $31,300	Not capped by the SUV rule

IRC 168(k), 179 as amended by P.L. 119-21; Pub. 946 (2025).

Premium

Every note. Every question. One pass.

5 more sections of this note are part of Premium.

Every section of every study note
750+ original questions across every outline topic
Full timed practice exams
A worked explanation on every question
Your full mistake bank and weak-area review

Unlock with Premium

From about US$12.42/mo on the Until-you-pass pass (12 months)

Exam-style questions

← Previous note: Business Income and Deductions All study notes

← All study notes

Business Tax Preparation