Welcome to Cost Recovery!

Hello, future CPA! If you’ve ever bought something expensive—like a laptop for your business or a delivery truck—you know it doesn't stay brand new forever. In the world of taxes, the IRS doesn't usually let you deduct the whole cost of a big purchase all at once. Instead, you "recover" that cost over several years. This is what we call Cost Recovery.

Tax cost recovery deducts eligible capital costs under statutory depreciation, amortization or depletion rules. Tax recovery periods are prescribed by law and need not equal an asset’s economic useful life or book depreciation period.

1. MACRS: The Golden Rule of Depreciation

The IRS uses a system called MACRS (Modified Accelerated Cost Recovery System) to calculate depreciation. It tells us two things: how long we spread the cost and how much we deduct each year.

Personal Property: The "Stuff" You Use

Under the usual GDS classifications, computers and many cars/light trucks are 5-year property and office furniture is generally 7-year property. Machinery must be classified by its applicable asset class; not all machinery has a 7-year life. ADS and special statutory rules may require different recovery periods or methods.

Common MACRS Recovery Periods:

  • Under the usual GDS classifications, computers and many cars/light trucks are 5-year property and office furniture is generally 7-year property. Machinery must be classified by its applicable asset class; not all machinery has a 7-year life. ADS and special statutory rules may require different recovery periods or methods.

Use the mid-quarter convention if the aggregate depreciable basis of applicable MACRS property placed in service in the last three months exceeds 40% of the year’s applicable total. Use basis after section 179 but before bonus depreciation; exclude property subject to the mid-month convention and property placed in service and disposed of in the same year. Otherwise the half-year convention generally applies to such property. Use the correct IRS table for class, quarter and recovery year; do not substitute a guessed percentage.

  1. Use the mid-quarter convention if the aggregate depreciable basis of applicable MACRS property placed in service in the last three months exceeds 40% of the year’s applicable total. Use basis after section 179 but before bonus depreciation; exclude property subject to the mid-month convention and property placed in service and disposed of in the same year. Otherwise the half-year convention generally applies to such property. Use the correct IRS table for class, quarter and recovery year; do not substitute a guessed percentage.

Use the mid-quarter convention if the aggregate depreciable basis of applicable MACRS property placed in service in the last three months exceeds 40% of the year’s applicable total. Use basis after section 179 but before bonus depreciation; exclude property subject to the mid-month convention and property placed in service and disposed of in the same year. Otherwise the half-year convention generally applies to such property. Use the correct IRS table for class, quarter and recovery year; do not substitute a guessed percentage.

Real Property: Buildings and Land

Under GDS, residential rental buildings generally use 27.5 years and nonresidential real property 39 years, straight-line with the mid-month convention. These are GDS rules, not universal lives: ADS and special property rules can differ. The convention uses the placed-in-service date, not merely the purchase date. Land is not depreciable.

The Two Magic Numbers to Memorize:

  • Under GDS, residential rental buildings generally use 27.5 years and nonresidential real property 39 years, straight-line with the mid-month convention. These are GDS rules, not universal lives: ADS and special property rules can differ. The convention uses the placed-in-service date, not merely the purchase date. Land is not depreciable.

Common Mistake Alert: Never, ever depreciate Land! Land does not wear out or get old. If you buy a building for \$500,000, you must subtract the value of the land before you start calculating depreciation.

Under GDS, residential rental buildings generally use 27.5 years and nonresidential real property 39 years, straight-line with the mid-month convention. These are GDS rules, not universal lives: ADS and special property rules can differ. The convention uses the placed-in-service date, not merely the purchase date. Land is not depreciable.

2. Section 179 and Bonus Depreciation: The "Fast Track"

Sometimes, the government wants to encourage businesses to spend money by letting them deduct the full cost of an asset immediately. This is like a "VIP pass" to skip the 5 or 7-year wait.

Section 179 Deduction

For tax years beginning in 2026, the section 179 deduction ceiling is $2,560,000, reduced dollar-for-dollar for qualifying property placed in service above $4,090,000, and subject to the business taxable-income limit. Acquisition eligibility and related-party rules also apply. For section 179’s special family definition, a spouse, ancestors and lineal descendants count; siblings are not included merely because they are siblings.

  1. For tax years beginning in 2026, the section 179 deduction ceiling is $2,560,000, reduced dollar-for-dollar for qualifying property placed in service above $4,090,000, and subject to the business taxable-income limit. Acquisition eligibility and related-party rules also apply. For section 179’s special family definition, a spouse, ancestors and lineal descendants count; siblings are not included merely because they are siblings.

Bonus Depreciation

Eligible property acquired and placed in service after January 19, 2025 generally qualifies for 100% bonus depreciation, subject to eligibility, elections and statutory exceptions. Check both dates and the applicable tax year; do not use the superseded general phase-down for qualifying 2026 acquisitions. Apply section 179 first, then bonus, then regular MACRS. Unlike section 179, bonus depreciation is not limited by business taxable income.

Did you know? You usually apply Section 179 first, then Bonus Depreciation, and then regular MACRS on whatever cost is left!

3. Amortization: For the "Invisible" Assets

Amortization is just depreciation for intangible assets. We use the Straight-Line method for these.

Section 197 Intangibles

Amortizable section 197 intangibles generally use straight-line amortization over 180 months beginning with the month acquired. Many self-created intangibles are excluded, but self-created trademarks and trade names can fall within statutory exceptions to that exclusion; do not treat every self-created intangible as ineligible. Check the particular asset and section 197 requirements.

Business Start-up and Organizational Costs

Startup costs under section 195 and corporate organizational costs under section 248 have separate deduction calculations. For each category, up to $5,000 is deductible when business begins, reduced dollar-for-dollar by that category’s costs above $50,000; the remainder is amortized over 180 months beginning with the month business starts. Do not combine both categories into one $5,000 allowance or one $50,000 phaseout test. Partnership organizational costs have their own section 709 rules.

Memory Aid: Think of "15 years" as the magic number for almost all business-purchase intangibles.

4. Depletion: For Mother Nature

Depletion is used for natural resources like oil, gas, timber, or minerals. There are two ways to calculate it:

  1. Compute cost depletion from adjusted depletable basis and units sold. Percentage depletion is available only for eligible resources and taxpayers; timber does not qualify. Where both methods are permitted, use the applicable larger deduction after limitations. The property taxable-income limit is generally 50%; qualifying oil and gas percentage depletion uses a 100% property-income limit and may also face a 65% overall taxable-income limit and other restrictions. Do not apply one universal 50% rule to all resources.

Compute cost depletion from adjusted depletable basis and units sold. Percentage depletion is available only for eligible resources and taxpayers; timber does not qualify. Where both methods are permitted, use the applicable larger deduction after limitations. The property taxable-income limit is generally 50%; qualifying oil and gas percentage depletion uses a 100% property-income limit and may also face a 65% overall taxable-income limit and other restrictions. Do not apply one universal 50% rule to all resources.

Summary Quick Review Box

Under the usual GDS classifications, computers and many cars/light trucks are 5-year property and office furniture is generally 7-year property. Machinery must be classified by its applicable asset class; not all machinery has a 7-year life. ADS and special statutory rules may require different recovery periods or methods.

Encouraging Note: You've got this! Cost recovery is mostly about knowing which "bucket" an asset falls into (Is it a 5-year car or a 39-year building?). Once you identify the bucket, the rules follow naturally. Keep practicing those calculation steps!