How to Write Off Fixed Assets for Your Business

Businesses invest in long-term assets like machinery, vehicles, office furniture, and buildings. Fixed assets are tangible items a company owns and uses to generate income, not for resale. Unlike everyday expenses, the full cost of a fixed asset cannot typically be deducted in the year of purchase for tax purposes. Instead, businesses “write off” these assets over their useful life through a process called depreciation.

Depreciation allows a business to recover the cost of an asset over time, reflecting its wear and tear or obsolescence. This annual deduction reduces the business’s taxable income, which in turn lowers its tax liability. This provides a steady stream of tax benefits, helping businesses manage cash flow and reinvest.

Understanding Fixed Asset Write-Off Methods

Businesses can use several methods to write off fixed assets for tax purposes. The primary method is the Modified Accelerated Cost Recovery System (MACRS), for most tangible property placed in service after 1986. MACRS allows businesses to recover asset costs over a specified period, typically providing larger deductions in earlier years. This accelerated depreciation can reduce taxable income and improve cash flow.

Section 179 deduction permits businesses to expense the full purchase price of qualifying property, up to a limit, in the year the asset is placed in service. This immediate expensing allows for a substantial upfront deduction, unlike depreciation. Section 179 is particularly beneficial for small and mid-sized businesses looking to invest in equipment and software.

Bonus depreciation enables businesses to deduct a large percentage of qualifying new or used property in the year it is placed in service. This allowance provides an additional first-year deduction on top of regular depreciation. While the bonus depreciation rate was previously 100%, it began phasing down in 2023, reaching 60% for property placed in service in 2024, and is set to decline further in subsequent years.

Qualifying for Fixed Asset Deductions

Eligibility for fixed asset deductions depends on criteria for each method. For MACRS, property must be tangible, used in a trade or business or for income production, and have a determinable useful life of more than one year. The IRS assigns assets to classes, each with a predetermined recovery period; for instance, computers often have a 5-year recovery period, while office furniture falls under a 7-year period. The system includes the General Depreciation System (GDS), more commonly used, and the Alternative Depreciation System (ADS), which uses longer recovery periods.

Section 179 allows businesses to deduct the cost of qualifying tangible personal property, such as machinery, equipment, and qualified real property improvements. For tax years beginning in 2024, the maximum Section 179 expense deduction is $1,220,000. This deduction begins to phase out if the total cost of Section 179 property placed in service during the year exceeds $3,050,000, reducing dollar-for-dollar above this threshold. Additionally, the deduction cannot exceed the business’s taxable income, meaning it cannot create a net loss.

Bonus depreciation applies to tangible property with a MACRS recovery period of 20 years or less, including used property and qualified improvement property. For property placed in service in 2024, the bonus depreciation rate is 60%. This rate is scheduled to decline to 40% in 2025 and 20% in 2026, reaching 0% in 2027. Unlike Section 179, bonus depreciation can create or increase a net operating loss, which can be carried forward to offset future taxable income.

Calculating and Reporting Your Deductions

Calculating fixed asset deductions involves applying each method’s rules to the asset’s cost. For MACRS, calculation depends on the asset’s class life, depreciation method (often 200% declining balance), and applicable convention (typically half-year). Businesses multiply the asset’s depreciable basis by a specific depreciation rate from IRS tables. For example, a $10,000 asset with a 5-year recovery period would have a larger deduction in the first year than in subsequent years under the accelerated method.

For Section 179, calculation is straightforward: businesses elect to expense qualifying property up to the annual limit, considering the phase-out threshold. If a business buys $1,500,000 of qualifying equipment in 2024, they can elect to deduct the maximum $1,220,000, provided their total purchases do not exceed the phase-out amount significantly. The remaining cost is then depreciated under MACRS. Bonus depreciation calculations involve multiplying the qualifying asset’s cost by the applicable bonus percentage for the year it was placed in service. For a $100,000 asset placed in service in 2024, a 60% bonus depreciation would result in an immediate $60,000 deduction.

All deductions are reported on IRS Form 4562, “Depreciation and Amortization,” filed with the business’s annual tax return. Part I of Form 4562 is used for electing the Section 179 deduction, reporting the elected cost and total deduction. Part II reports the special depreciation allowance, or bonus depreciation, requiring the total cost of eligible property and calculated bonus amount. Regular MACRS depreciation is reported in Part III, where assets are grouped by recovery class and the annual depreciation amount for each class is entered. Detailed information, such as the asset’s description, date placed in service, and cost, is required.

Maintaining Proper Records

Maintaining meticulous records is important for substantiating fixed asset deductions and ensuring tax compliance. Businesses should keep documents related to fixed asset acquisition, including purchase invoices, bills of sale, and receipts for improvements. These records provide proof of ownership, the asset’s cost basis, and the date it was placed in service, essential for calculating depreciation and other deductions.

Maintain detailed depreciation schedules for each asset. These schedules track the annual depreciation taken, the remaining book value, and the asset’s recovery period. This documentation is crucial for accurately determining gain or loss when an asset is sold or disposed of. Proper records also serve as a defense in an IRS audit, demonstrating claimed deductions are legitimate and supported by evidence.

Businesses should organize records systematically, whether physically or digitally, for easy access. The IRS generally recommends keeping tax records for at least three years from the date the return was filed, aligning with the statute of limitations for audits. However, records for assets should be retained until three years after the period of limitations expires for the tax year in which the asset is sold or otherwise disposed of, which can extend the retention period significantly. Consistent and thorough record-keeping supports accurate financial reporting and helps avoid potential penalties.