What Is Depreciated Over 15 Years? Key Assets and Tax Implications
Learn which assets depreciate over 15 years, how depreciation affects their tax treatment, and key considerations for basis adjustments and potential recapture.
Depreciation allows businesses to recover asset costs over time, reducing taxable income. The IRS assigns different recovery periods based on asset type, with 15-year depreciation applying to specific categories like land improvements and qualified leasehold improvements. Knowing which assets fall under this timeline ensures accurate tax reporting and compliance.
Common Assets With 15-Year Depreciation
Assets in this category wear out over time but last longer than equipment or machinery. One common example is land improvements, including sidewalks, fences, parking lots, and landscaping. These enhancements, separate from the land itself, deteriorate over time and qualify for 15-year depreciation under the Modified Accelerated Cost Recovery System (MACRS).
Qualified improvement property (QIP) is another major category. This includes interior upgrades to nonresidential buildings, such as drywall, plumbing, electrical systems, and flooring, as long as they are made after the building is placed in service. Originally classified under a 39-year schedule, QIP was reclassified to 15 years under the 2020 CARES Act, correcting an error in the 2017 Tax Cuts and Jobs Act (TCJA). This change also made QIP eligible for 100% bonus depreciation through 2026.
Certain agricultural structures also qualify, including irrigation systems, drainage facilities, and livestock barns. These structures, essential to farming, deteriorate due to exposure to the elements, justifying their shorter recovery period.
Methods for Figuring 15-Year Depreciation
Depreciating a 15-year asset requires following IRS guidelines. The most common system is MACRS, which provides larger write-offs in the early years. Typically, these assets use the 150% declining balance method before switching to straight-line depreciation when it results in a higher deduction. This accelerates early-year depreciation, reducing taxable income upfront.
The half-year convention is generally applied, meaning the IRS assumes an asset is placed in service at the midpoint of the year, regardless of the actual purchase date. This results in only half of the first year’s depreciation being deductible. If more than 40% of total depreciable assets purchased in a year are placed in service during the last three months, the mid-quarter convention applies instead. This rule prevents businesses from making large purchases late in the year to maximize deductions.
Bonus depreciation and Section 179 expensing can further impact deductions. As of 2024, bonus depreciation allows businesses to deduct 60% of an asset’s cost in the first year, with the balance depreciated under MACRS. This percentage is set to decrease annually until it phases out by 2027 unless extended. Section 179 allows full upfront deductions for eligible assets, subject to a $1.22 million limit for 2024 and a phase-out threshold of $3.05 million. Unlike bonus depreciation, Section 179 deductions cannot exceed taxable income, while bonus depreciation can create a net operating loss.
Effect on Asset Basis During Holding Period
An asset’s basis starts with its original cost, adjusted over time for depreciation and other factors. Each year, depreciation lowers the basis, reducing the amount recorded for tax and financial reporting. This adjusted basis is crucial for determining future deductions and calculating gains or losses upon sale.
Other adjustments also impact basis. Capital improvements, such as repaving a parking lot, increase basis since they extend the asset’s useful life. These costs are added to the existing basis and depreciated separately. Casualty losses, such as storm or fire damage, may require a downward adjustment. If insurance covers part of the loss, only the unrecovered portion reduces the basis.
Tax credits and government incentives also affect basis calculations. For example, if an asset qualifies for an energy efficiency tax credit, the credit amount reduces its basis, lowering future depreciation deductions. Refinancing a loan used to purchase the asset does not directly affect basis, though refinancing costs may be amortized separately.
Depreciation Recapture if You Sell
Selling a depreciated asset triggers depreciation recapture, which affects tax liability. This rule ensures that prior depreciation deductions, which reduced taxable income, are appropriately taxed upon sale.
Most 15-year assets fall under Section 1250 of the Internal Revenue Code, meaning the portion of the gain due to prior depreciation is taxed at a maximum rate of 25%. This differs from standard long-term capital gains rates, which range from 0% to 20%, depending on income. If an asset sells for more than its depreciated basis but less than its original cost, the entire gain is due to depreciation recapture and taxed at the higher rate. Any gain beyond the original cost is treated as a capital gain and taxed at the lower long-term capital gains rate.