MACRS, Section 179 & Bonus Depreciation (CPA REG)
MACRS, Section 179 & Bonus Depreciation Explained (CPA REG)
Cost recovery is a high-frequency REG topic: recovery periods, conventions, and the stacking order of Section 179, bonus depreciation, and regular MACRS. The dollar limits changed under the 2025 tax law, so the figures here are dated and flagged for the exam cut-off.
Area III · 5–15% Application & Analysis IRC §168 · §179Quick answer: MACRS is the mandatory system for depreciating most tangible business property placed in service after 1986. Personal property uses 3-, 5-, 7-, 10-, 15-, or 20-year recovery periods; residential rental real property uses 27.5 years and non-residential real property 39 years, both straight-line. A taxpayer can accelerate deductions with Section 179 expensing (up to $2.5 million for 2025, subject to a taxable-income limit and a $4 million phase-out) and 100% bonus depreciation (for qualifying property acquired and placed in service after 19 January 2025). The stacking order is Section 179 first, then bonus, then regular MACRS on any remaining basis.
Verify against your exam cut-off. The One Big Beautiful Bill Act (signed 4 July 2025) restored 100% bonus depreciation and raised the Section 179 limit to $2.5 million with a $4 million phase-out. The AICPA tests federal tax law enacted as of a fixed cut-off before each testing window, so confirm which figures apply to your quarter before relying on them. Older review notes still show the TCJA phase-down (40% bonus in 2025, 20% in 2026) — that schedule was reversed by the 2025 law.
Recovery periods and conventions
MACRS assigns every asset a class life and a convention. The 200% declining-balance method applies to 3-, 5-, 7-, and 10-year property; the 150% method applies to 15- and 20-year property; both switch to straight-line when that produces a larger deduction. Real property is always straight-line.
| Class | Typical assets | Method |
|---|---|---|
| 5-year | Autos, light trucks, computers, office equipment | 200% DB |
| 7-year | Office furniture, fixtures, most machinery | 200% DB |
| 15-year | Land improvements, qualified improvement property | 150% DB |
| 27.5-year | Residential rental buildings | Straight-line |
| 39-year | Non-residential real property | Straight-line |
Three conventions, three triggers. The half-year convention is the default for personal property — a half-year of depreciation in the year of acquisition and of disposition. The mid-quarter convention is mandatory instead if more than 40% of the aggregate basis of personal property is placed in service in the final quarter of the year, and then applies to all personal property placed in service that year. The mid-month convention applies to all real property.
The stacking order: §179, bonus, then MACRS
When a taxpayer wants the largest first-year deduction, the tools are applied in a fixed sequence. Section 179 is elected first, up to the annual limit and capped at taxable income — it cannot create or increase a loss. Bonus depreciation is applied next to the remaining basis; it has no income limit and can create a net operating loss. Whatever basis survives both is then depreciated under regular MACRS.
Worked example. Sana's business places $80,000 of 7-year machinery in service in 2025 (half-year convention, no other assets that quarter).
· With 100% bonus depreciation: the entire $80,000 is deducted in year 1.
· Without bonus or §179, regular MACRS: year 1 = $80,000 × 14.29% (7-year, half-year, year 1 rate) = $11,432.
· Section 179 alternative: she could instead elect to expense the full $80,000 under §179, provided her taxable income is at least $80,000.
The gap between $80,000 and $11,432 in year 1 is why the election choices are worth marks — the exam wants you to know which tool is limited by income and which is not.
Section 179 details that get tested
Section 179 applies to tangible personal property and certain qualified real property — roofs, HVAC, fire protection, and security systems on non-residential buildings. The deduction is capped by taxable business income, and any amount disallowed by that limit carries forward. The dollar limit phases out dollar-for-dollar once total qualifying property placed in service exceeds the $4 million threshold, and both the limit and threshold are indexed for inflation after 2025. Property used 50% or less for business cannot use §179, bonus, or accelerated MACRS and must be depreciated straight-line over the ADS life.
Match the asset to its class and convention, then layer §179 (income-limited) and bonus (not income-limited) before regular MACRS. Date every dollar figure and check it against your testing window.
Frequently asked questions
What is the difference between Section 179 and bonus depreciation?
Both give an immediate write-off, but Section 179 is a dollar-capped election limited to taxable income, while bonus depreciation is a percentage (100% for qualifying 2025 property) with no income cap that can create a net operating loss. Section 179 is applied first, then bonus.
When does the mid-quarter convention apply?
When more than 40% of the aggregate basis of personal property placed in service during the year falls in the fourth quarter. It then applies to all personal property placed in service that year, not just the fourth-quarter assets. Real property is excluded from the test.
How long do I depreciate a commercial building?
Non-residential real property is depreciated straight-line over 39 years using the mid-month convention. Residential rental property uses 27.5 years. Land itself is never depreciated.
Are these dollar limits final for the CPA exam?
Treat them as checkout-locked. The 2025 figures reflect the One Big Beautiful Bill Act, but the AICPA tests law as of a cut-off date, so confirm the applicable limits and bonus percentage for your specific testing quarter before the exam.
Surgent CPA Review, available through Eduyush for ₹32,000, keeps cost-recovery limits current and drills the §179/bonus/MACRS stacking order in exam-format questions — part of 9,000+ MCQs and 500+ simulations, with ReadySCORE tracking your Area III readiness.
Explore the CPA courseDeciding which state board, review course, or exam order fits your timeline? Talk to the Eduyush team on WhatsApp at +91 96433 08079.
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