Tax Depreciation: The Impact of Depreciation on Taxes
Updated on February 26, 2026 | 4 min. read
Tax depreciation is a deduction allowed by the IRS that allows a business to expense a business asset on its tax return. By claiming depreciation, a business can reduce its taxable income. Depreciation is a method for allocating the cost of fixed or tangible assets over the years in which the assets helped generate revenues or sales, or over their useful life. By claiming a depreciation expense, the business reduces its net income on which taxes are based, thus decreasing the tax owed. Businesses can take a depreciation deduction by filing Form 4562 with their tax return.
What does tax depreciation mean?
Tax depreciation is a process by which taxpayers write off the cost of a machine, car, or other business acquisition on their tax returns. This allows businesses to recover their investment over a specified period. Depreciation is the gradual decrease in the cost of a fixed asset over its useful life. You can only depreciate tangible assets (other than land) that your business owns, uses for income-producing activities, as a determinable useful life, and is expected to last more than a year.
If these rules are not met, then the entire cost of the asset must be charged to the period in which it was incurred. Land is never depreciated. Unlike book or financial depreciation, which is based on the matching principle of accounting and reported on a business's financial statements, tax depreciation is recorded on the company’s income tax returns and is based on IRS rules.
Which depreciation method is used for tax purposes?
While financial depreciation is calculated using the straight-line method, which results in an even distribution of the expense over the life of the asset, tax depreciation is calculated using the Modified Accelerated Cost Recovery System, or MACRS.
MACRS
The Modified Accelerated Cost Recovery System (MACRS) depreciation method allows businesses to depreciate assets more in the first few years than in later years of the asset’s life.
While this method may reduce income tax payments in the asset’s initial years, the business won’t have depreciation tax benefits in later years.
Section 179 deduction
A business is allowed to make the election to use the Section 179 deduction for some property. Under Section 179 Deduction, you’re allowed to deduct the entire cost of the asset in the year it’s acquired, up to a maximum of $2,5000,000 in 2025. If your total acquisitions exceed $4,000,000, the maximum deduction begins to be phased out. Unused deductions can be carried forward to the following years.
Usually, larger businesses keep separate records for book depreciation and tax depreciation because of differences in the calculation methods. Smaller businesses often use tax depreciation on their books to match the tax return to the profit and loss statement and the balance sheet.
Bonus depreciation
The IRS also allows a tax break called Bonus Depreciation. For the tax year 2025, you may take 100% bonus depreciation on assets purchased and placed in service after January 19th, 2025. For assets acquired before January 19, 2025, the depreciation is 40%.
What is a tax depreciation schedule?
By creating a tax depreciation schedule, you can maximize the cash return from your business or investment property each financial year. The schedule can also be used to claim any missed deductions from the past year.
How does depreciation work on taxes?
Depreciation is a tax deduction that allows you to recover the cost of assets that you purchase and use for your business.
Unlike financial depreciation, which is closely aligned with the actual use of assets, the amount of tax depreciation is calculated based on the classification assigned to an asset, irrespective of its actual use. The classification will determine the asset's useful life and the number of years required to recover its cost.
If you have made adjustments to your business’s financial records and are awaiting updates, tools like “Where’s My Amended Return” from the IRS can provide valuable insights into the processing status of your amended returns.
Once you’ve calculated depreciation, you must complete Form 4562 to claim your tax deduction for each asset. This form should be filed with your tax return. If you’re uncertain about the amount of tax depreciation and how to accurately report it, it’s best to consult a tax advisor.
