A practical, plain-English guide to depreciation for small businesses: bonus depreciation, Section 179, business vehicles, rental property schedules, cost segregation, and the de minimis safe harbor plus when to time deductions for maximum tax savings.
TL;DR (for busy founders)
- Bonus depreciation can allow a 100% deduction when an asset is placed in service (started being used) after January 19, 2025 with special rules for vehicles and exclusions for buildings.
- Section 179 is the “other” 100% first-year deduction, with SUV and car limits you must respect.
- Business vehicles are highly audited; keep airtight mileage logs, ensure >50% business use, and title in the business name.
- Rental properties: commercial (including many short-term rentals) depreciate over 39 years; residential over 27.5 years.
- Cost segregation reclassifies parts of a building so you can depreciate faster (and often pair with bonus depreciation or Section 179).
- Timing matters: sometimes you’ll save more by electing out of bonus and spreading deductions across higher-income years.
- De minimis safe harbor: items $2,500 or less can be expensed immediately.
- Good hygiene: don’t buy just for a write-off, save documentation, and remember most deductions require “placed in service” in the year claimed.
Why depreciation isn’t scary (and why it matters to profits)
Depreciation simply recognizes that business stuff gets older, and the IRS lets you deduct that loss of value over time. If you feel overwhelmed by the rules, you’re not alone; there are a lot of them. This guide distills what small and midsize business owners ask us most often so you can make depreciation work for you (and know when to call in help).
Our goal: help you translate tax rules into profit-driving decisions and tie those decisions to your fractional CFO, accounting & bookkeeping, and tax planning strategy.
Bonus Depreciation (a.k.a. the “big” deduction)
This is the headliner you’ve probably heard about. Under current guidance in your document, you can take a 100% deduction for assets placed in service after January 19, 2025 with “placed in service” meaning you’ve started using the asset in your business. Buildings don’t qualify; they still follow multi-year schedules.
Why owners love it
You can capture a large deduction without paying 100% in cash on day one. For example, buy a truck for $50,000, put down $5,000, finance the rest yet still deduct the full $50,000 under bonus depreciation.
The fine print (especially for vehicles)
- Buildings: Not eligible for bonus depreciation; they follow 27.5- or 39-year schedules.
- Passenger vehicles: Bonus may be capped at $20,200 unless the vehicle has GVWR > 6,000 lbs (heavy vehicles follow different limits).
How your CFO can help: Model cash, financing terms, and tax timing so your fixed asset adds to EBITDA, not just your deduction tally.
Section 179 (the other big first-year deduction)
Think of Section 179 as bonus depreciation’s older cousin: it also lets you deduct 100% of eligible assets in the year you place them in service (subject to annual limits and business income).
Which is better: Bonus vs. Section 179?
Both can produce a 100% write-off, but vehicle rules tilt the analysis:
- SUVs: Max Section 179 deduction $31,300.
- Cars: Max Section 179 deduction $12,200.
In practice, we compare both options across your projected profit, entity type, and equipment mix. then integrate with your book depreciation schedule to keep your financial statements clean for lenders and investors.
Business vehicles: deductions, documentation & audit-proofing
Vehicles are the most popular (and most audited) asset class we see. That means paperwork perfection matters.
Must-haves:
- Purchased, not leased (for the specific treatment above).
- Titled to the business.
- >50% business use, measured by miles—e.g., if your odometer reads 10,000 at year-end, you need ≥5,000 business miles.
- Every mile documented. A mileage app is fine (and recommended).
Pro tip from your fractional CFO: Build a vehicle policy (who can drive, what counts as business miles, log cadence) and train your team then your bookkeeping flows straight into clean fixed asset and depreciation entries each month.
Rental properties: residential vs. commercial schedules
If you own rental real estate, you’ll deduct part of the building each year. The type of rental determines the schedule:
- Commercial property: 39 years. Short-term residential rentals (e.g., many Airbnbs) are treated as commercial. Think hotel-like use.
- Residential long-term rentals: 27.5 years.
If your growth strategy includes buying or renovating rentals, depreciation planning belongs in your capital stack conversation especially if you’re targeting cash-on-cash return and tax-advantaged income.
Cost segregation: accelerate what’s inside the walls
A building isn’t just a building: it’s appliances, cabinets, flooring, and more. Many of those components qualify for shorter depreciable lives, which can open the door to bonus depreciation or Section 179 on those parts. That’s the essence of a cost segregation study.
Said differently: you can speed up deductions by correctly classifying assets beyond the default 27.5- or 39-year buckets.
Finance tip: Cost seg is most powerful when your tax rate is high, your hold period is clear, and your book/tax differences won’t spook lenders. Your fractional CFO can model the trade-offs.
Timing your depreciation: sometimes smaller now means bigger later
It’s counterintuitive, but taking the biggest first-year write-off isn’t always optimal. If your current income puts you in a lower bracket, you may want to elect out of bonus depreciation and spread deductions into future, higher-income years where each dollar deducted saves more tax.
Example:
- Current year: effective tax rate 20%; asset cost $20,000 → Bonus write-off $20,000 → tax savings $4,000.
- Next years: expected rate 30%; asset is 5-year property. Using the MACRS schedule, the total tax savings over six years is $5,602—that’s $1,602 more than taking the entire deduction in year one.
Your CFO playbook: Build a multi-year tax capacity model that aligns depreciation with growth, cash needs, and lender covenants.
De minimis safe harbor (Section 1.263(a)-1(f))
An easy win: if an item costs $2,500 or less, you can expense it immediately under the de minimis safe harbor—no depreciation, no hassle. We make this election by default for clients each year.
Practical guardrails (from your tax team)
- Don’t buy just for the write-off. Tax comes after a solid business case (and a CFO thumbs-up).
- Document everything. Save invoices, receipts, and mileage logs—audit defense starts with proof.
- Placed in service is key: bonus and Section 179 apply in the year you start using the asset in your business.
- Schedule C owners can claim depreciation on personal returns—you don’t need a separate business return to deduct depreciation.
How this ties back to your growth plan
- Fractional CFO services: We forecast income and optimize timing (bonus vs. MACRS vs. Section 179), align with capital expenditures, and present clean board- and lender-ready financials.
- Accounting & Bookkeeping: We maintain a fixed asset subledger, monthly depreciation entries, and reconciliations, ensuring your tax depreciation and book depreciation are tracked without surprises.
- Tax planning & filing: We select elections (e.g., de minimis safe harbor), prepare vehicle documentation kits, and file accurately to minimize risk and maximize savings.
FAQ’s
What does “placed in service” actually mean?
It means the date you started using the asset in your business. For bonus depreciation and Section 179, the asset generally must be placed in service during the tax year you claim the deduction.
Do buildings qualify for bonus depreciation?
No. Buildings follow 27.5- or 39-year depreciation schedules by default (though cost segregation can accelerate parts of the building).
How much bonus depreciation can I take on a car?
Bonus on passenger vehicles may be capped at $20,200 unless the vehicle’s GVWR exceeds 6,000 lbs (subject to other rules).
What are Section 179 limits for vehicles?
Under these guidelines: SUVs $31,300; cars $12,200 (check your facts annually; vehicle thresholds can be quirky).
What documentation do I need for a business vehicle?
Title the vehicle to your business, ensure >50% business use, and log every mile (apps help).
Are short-term rentals (e.g., Airbnbs) residential or commercial for depreciation?
They’re often treated as commercial property and depreciated over 39 years.
Should I always take the biggest first-year write-off?
Not necessarily. If your future tax rate will be higher, electing out of bonus and using MACRS can yield more total savings.
Can I expense small purchases immediately?
Yes, under the de minimis safe harbor, items $2,500 or less are expensed right away.
Turn depreciation into a growth lever
If you’re buying equipment, adding vehicles, or expanding into rentals, the timing and method of your write-offs can swing your tax bill—and your cash flow—by a wide margin. Book a call with CleverProfits to map the bonus vs. Section 179 vs. MACRS decision to your growth plan, and we’ll build the fixed-asset and tax calendar to match.
Tax laws change and your situation is unique. Consult a tax professional before acting.
The Clever Writing Team
The CleverProfits writing team includes various team members in Advisory, Financial Strategy, Tax, and Leadership. Our goal is to provide relevant and easy-to-understand financial content to help founders and business leaders reach their true potential.
TABLE OF CONTENTS
- 000 pounds, bonus depreciation, bookkeeping for depreciation, business vehicle deduction, commercial vs residential depreciation, cost segregation study, de minimis safe harbor, depreciation schedule, fixed asset accounting, fractional CFO services, GVWR 6, IRS audit documentation, MACRS depreciation, placed in service, rental property depreciation, Schedule C depreciation, Section 179 deduction, small business tax planning, tax filing for SMBs
