Understand book vs. tax depreciation and maximize your deductions.
When you buy a piece of equipment, a vehicle, or other long-lived asset, you don't expense the entire cost immediately. Instead, you spread that cost over the asset's useful life—matching the expense to the periods when you're actually using the asset.
This spreading of cost is called depreciation. It's an accounting concept that reduces your reported income over time and, importantly, reduces your taxes.
Key insight: You'll typically track TWO different depreciation amounts for every asset—one for financial reporting (book) and one for taxes. They can be very different, and that's completely normal and legal.
This is what shows up on your financial statements. The goal is to reflect economic reality—spreading the cost over the period you actually benefit from the asset.
This is what you report to the IRS. The goal is often to minimize taxes by taking deductions as fast as legally allowed.
Having different amounts is normal. Your book depreciation might be $5,000 this year while your tax depreciation is $15,000. The difference creates what accountants call a "deferred tax" item.
The simplest and most common method. You take equal depreciation expense every year.
Annual Depreciation = (Cost - Salvage Value) ÷ Useful Life
Example: A $25,000 delivery van with $5,000 salvage value and 5-year life:
($25,000 - $5,000) ÷ 5 = $4,000 per year
Pros: Simple, predictable, easy to forecast
Cons: Doesn't maximize early tax deductions
Best for: Assets that wear evenly over time; financial reporting purposes
An accelerated method that front-loads depreciation. You take more expense in early years, less in later years.
Double the straight-line rate, apply to the remaining book value each year.
Same $25,000 van example (5-year life):
Pros: Matches reality for assets that lose value quickly
Cons: More complex; lower deductions in later years
Best for: Technology, vehicles, equipment that becomes obsolete
Depreciation based on actual usage rather than time. Great for machinery, vehicles, or equipment with variable use.
Per-Unit Rate = (Cost - Salvage) ÷ Total Expected Units
Annual Depreciation = Per-Unit Rate × Actual Units Used
Example: A $50,000 machine expected to produce 100,000 units:
Per-unit rate = $50,000 ÷ 100,000 = $0.50
If you produce 15,000 units this year: $0.50 × 15,000 = $7,500 depreciation
Pros: Matches expense to actual usage; fair if use varies
Cons: Requires tracking usage; unpredictable expense
Best for: Manufacturing equipment, delivery vehicles (by mileage)
The IRS's standard depreciation system. You don't get to choose—the IRS assigns recovery periods and provides depreciation tables.
Common MACRS Recovery Periods:
For most personal property (not buildings), MACRS uses a modified version of double declining balance, giving you accelerated deductions.
Instead of depreciating over time, you can deduct the entire cost in the year you buy the asset.
2024 Limits:
Maximum deduction: $1,160,000
Phase-out starts: $2,890,000 in total purchases
Key rules:
Best for: Profitable businesses that want immediate deductions
An additional first-year deduction on top of (or instead of) regular MACRS depreciation.
Current rates (phasing down):
Key differences from Section 179:
Most businesses should use straight-line for simplicity and consistency. Only use accelerated methods if the asset truly loses value faster in early years (like technology).
Generally, maximize deductions as fast as possible:
You buy $50,000 of equipment. Your tax rate is 25%.
| Method | Year 1 Deduction | Year 1 Tax Savings |
| Straight-line (5-year) | $10,000 | $2,500 |
| MACRS (5-year) | $10,000 | $2,500 |
| Section 179 | $50,000 | $12,500 |
| Bonus (60%) + MACRS | $34,000 | $8,500 |
Let Lease Easy AI handle the complexity. We track book and tax depreciation side-by-side, identify Section 179 and bonus depreciation opportunities, and generate all the schedules you need for tax time and audits.