Are you quietly losing money every time you buy equipment?
Not because of your purchase, but because you’re using the wrong deduction method?
Most business owners assume they have to depreciate items slowly, but they don’t. The rules are much more flexible than people think.
With the new 100% bonus depreciation, updated Section 179 limits, and a simple $2,500 capitalization policy, you can deduct most assets in year one instead of waiting years to get the tax benefit.
Here is how it works and how to choose the best method
What is Depreciation?
Depreciation is the process of spreading out the cost of long-lived assets over time.
Computers, equipment, vehicles, buildings, furniture, and technology are all depreciable.
But there are two important rules:
- Only business use counts. If the asset is 60% business, you only depreciate 60%.
• Land is never depreciated. Buildings and land improvements are.
Most owners assume depreciation must be slow. 3 years… 7 years… 39 years… But the tax code allows much faster options.
Your Three Main Depreciation Tools
1. Regular Depreciation
This is the slow method. You spread the cost over the IRS-defined life of the asset.
2. Section 179 Expensing
This allows you to deduct up to two and a half million dollars per year. It cannot create a business loss. You can only deduct up to your business income.
3. 100% Bonus Depreciation
Thanks to the One Big Beautiful Bill, bonus depreciation is back at 100% for assets placed in service after January 19, 2025. This lets you write off the full cost in year one. It can also create a loss, which can offset other income.
Bonus applies automatically unless you opt out.
Why This Strategy Works
Choosing the right depreciation method lets you control when you take deductions.
- Want to reduce this year’s taxable income as much as possible? Use bonus depreciation.
• Want to avoid creating a loss? Use Section 179 up to your income level.
• Expect a much higher income next year? Delay the deduction so it offsets income when the tax rate is higher.
Smart depreciation planning turns equipment purchases into strategic tax tools.
Who Can Use It?
Any business that buys long-lived assets:
- Sole proprietorships
• Single-member LLCs
• Partnerships
• Corporations
• Real estate investors
• Service businesses
• Product businesses
If you buy equipment, technology, furniture, machinery, or buildings, these rules apply to you.
The Capitalization Policy Most Owners Miss
The IRS offers a safe harbor rule that lets you immediately expense any asset under $2,500 per item.
No depreciation. No schedules. No tracking.
You only need two steps:
- A written capitalization policy on file stating you expense items under $2,500
- A simple safe harbor election added to your tax return
If you buy two computers for $4,000 total, but each costs $2,000, both qualify for an immediate deduction.
Every business should have this policy. It saves time and maximizes write-offs.
How to Do It Correctly
To use these deductions properly, follow the core rules:
- The business must be active
• The asset must be placed in service in the same year you want the deduction
• You must track the business-use %age
• You must follow the chosen depreciation method consistently
• You must apply your capitalization policy to all assets under the threshold
Placed in service means “ready to use,” not just paid for. Buying a computer in December does not qualify if it is not ready and usable until January.
When You Should Not Take Everything at Once
Most people want the biggest deduction now, but that is not always the best move.
If this year is a low-income year and next year is high, front-loading deductions may cost you money.
A deduction taken in a 10 % bracket is worth less than the same deduction taken in a 37 % bracket.
You can choose regular depreciation or elect out of bonus depreciation to time your deduction more strategically.
What Happens If You Sell a Depreciated Asset
If you sell an asset you wrote off, you may have depreciation recapture.
Your basis is the purchase price minus the depreciation taken.
If your basis is zero and you sell it for $2,000, the entire amount is taxable.
This is normal and expected. It is simply part of the depreciation rules.
TLDR
You can write off equipment much faster than you think.
Here is what to remember:
- Bonus depreciation allows 100 % first-year write-offs
• Section 179 gives you huge deductions up to your income limit
• A capitalization policy lets you expense anything under $2,500 per item
• Timing matters. Pick the method that saves the most based on your income
• Depreciation recapture applies when you sell depreciated assets
When done correctly, depreciation becomes one of the simplest and most powerful tax strategies for business owners.
Transcript
[00:00:00] Introduction to Depreciation
[00:00:00] Mike Jesowshek: Imagine this, you buy a shiny new piece of equipment for your business. Maybe it’s a computer or a manufacturing machine, or even high-end office furniture, and you know that you paid for it, but did you know that you might not have to spread that cost out over five, 10, or even 30 years? In fact, thanks to some major tax law changes, you may be able to deduct the entire cost in year one.
[00:00:20] Yes, year one today, we’re gonna dive into one of those under the radar, but powerful opportunities that we call depreciation. In capitalization policies, and we’re gonna talk about how smart businesses are using them. Now that the rules have shifted, we’ll explore when it makes sense to expense versus capitalize.
[00:00:38] How the safe harbor threshold works and how the 100% bonus depreciation and expanded section 1 79 deduction under the one big beautiful bill gives you new advantages if you own or manage a business and you’ve bought or. Plan to buy equipment, property, software, or other long-lived assets, you can’t afford to skip this one.
[00:00:57] So let’s dive right into it. [00:01:00]
[00:01:18] Understanding Depreciation Basics
[00:01:18] Mike Jesowshek: first off, what is this depreciation word? It can be confusing and a lot of people run away when they hear depreciation. So let’s just cover the facts of what is. Depreciation, and at a very basic level, depreciation is simply the process of spreading out the expense for an asset purchase over time.
[00:01:35] When you buy personal property, like a car, a computer, or other types of equipment, or if you buy real properties such as like a building, you have a few possible options. For deducting that cost, but you gotta do it right now. When we talk about what is depreciate depre items that can be depreciated, we’re thinking of things like machinery, equipment, buildings, vehicles, furniture, technology, computers, all those different things that we call depreciable [00:02:00] items.
[00:02:00] Again, depreciation is just taking the cost of purchasing that item and spreading it out over. Time. Now, you can only depreciate business use of items. So if you have a personal use of an item mixed in, or if you have just a personal item, of course we’re not gonna depreciate anything personal. But if you have a business and personal use mixed item, you only get to deduct or take depreciation on the business use of that item.
[00:02:23] So if it’s 40 or 60% business, you get 60% depreciation on that. Now, one thing to note about depreciation is that land. Is never depreciable, so we will never depreciate the cost of land, the land value, but buildings and land improvements on that land, those are depreciable. So let’s talk about some of the depreciation options.
[00:02:45] Depreciation Methods Explained
[00:02:45] Mike Jesowshek: And the main zone we’re gonna talking about are regular depreciation, bonus depreciation in section 1 79. Expensive. So let’s talk about regular depreciation. This is sometimes called straight line depreciation, or there’s a make’s depreciation, which is often used, especially for tax purposes. [00:03:00] A couple different versions of regular.
[00:03:02] Depreciation, but essentially with regular depreciation, you take the cost of an asset and take depreciation, expensing of it over time. It can be anywhere from three to 39 years depending on the type of asset that you’re working with. So you’re taking the cost of an asset you purchase, and you’re expense in that you’re getting the expense for that cost over the course of three to 39 years.
[00:03:22] Again, depending on the type of assets. The next one we have is bonus depreciation, and with the one big beautiful bill that passed here early in 2025, which was an incredible opportunity, they made 100% bonus depreciation permanent. Now, this is for anything bought and placed in service after January 19th, 2025.
[00:03:42] This is super powerful because it allows you to take a deduction for 100% of the cost of that asset purchase in year one. All in year one. Now with bonus depreciation, you can use bonus depreciation to create a loss in your business. This is gonna be different from section 1 7 9 [00:04:00] expensing, which we’ll discuss next, but you can use bonus depreciation to create a loss in your business.
[00:04:05] And one other thing to note about bonus depreciation is that via the tax law, it applies automatically unless you choose to elect out. So if you’re not gonna use the bonus depreciation, you need to elect out a bonus depreciation. The third method that we’re gonna talk about a depreciation standpoint is section 1 79 expensing, and with the one big, beautiful bill, this also got amplified.
[00:04:25] You can use what section 1 79 expensing on up to two and a half million dollars of assets per year. Now one thing to note about Section 1 79 expensing, you cannot deduct more than business income. Basically saying you cannot create a total business loss using Section 1 79. So let’s say you had business income of 300,000, but you have a section 1 79 expense of 400.
[00:04:48] The max you could take is 300, which brings you down to zero. Now, any unused amount can be carried forward. Now with bonus depreciation, you can create a loss. You can go below zero, section 1 79. You can’t.
[00:04:59] Choosing the Right Depreciation Method
[00:04:59] Mike Jesowshek: So a lot of times when we’re talking about depreciation, the question comes up. Which method do I use?
[00:05:04] Mike? You talked about regular depreciation, you talked about bonus depreciation. You talked about section 1 79, which one. Do I use, and that really depends on how much of a deduction you are looking for in this specific year. So the typical process that we would say is number one, let’s apply section 1 79 expensing first up to your business income limit.
[00:05:24] So up to the limit of your business income or the limit of section 1 79. Then we can apply bonus depreciation to the remaining cost and we can also use makers or regular depreciation for whatever is left. Over.
[00:05:36] Depreciation Use Cases
[00:05:36] Mike Jesowshek: But I think to help drive this home, I want to go through a couple use cases because this will help us understand specific cases when we may use bonus depreciation, when we may not, when we may use 1 79 and not bonus in various different instances.
[00:05:49] So use case number one. Let’s say you have taxable income and want to maximize deductions without creating a loss in your business. For that, we’re gonna use section 1 79. [00:06:00] Bonus may not even be necessary. It can be used, but it may not even be necessary when we can just use section 1 79. Situation number two is that you expect a loss or want to create one that you may use to offset other income.
[00:06:13] So you may be using a loss or wanting to use a loss in a business to offset income that you have in other areas of your life. If you use Section 1 7 9, you’re limited to it. You can only limit up to your business income. So if you wanted to max that out and create that loss, you’d have to use bonus once you’ve maxed out the section 1 7 9 or brought that income down to zero.
[00:06:32] Then you could use bonus. And scenario number three is that you bought a very large amount of equipment, or yours is a large business with high capital expenditures. Section 1 79 has a two and a half million dollar limitation. So if you’re a very large business with a lot of spending, bonus is likely gonna be the better option for you because you don’t have that two and a half million dollar cap with bonus depreciation.
[00:06:54] Now, one cool thing is that whether you’re using Section 1 79 or bonus depreciation, they can be used on new [00:07:00] or used assets, both qualify. So that’s one cool feature. But another thing I wanna talk about in the, and so many people get wrapped up in depreciation and taking it all in year one, and creating all these losses.
[00:07:10] Year-End Tax Planning
[00:07:10] Mike Jesowshek: But I wanna talk about a scenario. Especially as we come to year end, I want you to be thinking about if you have concerns about future year’s income, maybe you expect a higher income later and you want to spread the deductions out rather than front load them on. Maybe this year is a low income year, but you’re expecting a massive year next year, and you’re gonna say, Hey.
[00:07:27] As an, I’m in an income year a lower income year. I don’t necessarily need all that deductions, but I’d much rather have it next year when I’m gonna be in a very high income year. Different planning that you can do, you might choose to not take the full bonus depreciation this year, or you might use limit the use of section 1 79 or you have basis that you’re gonna wanna be thinking about.
[00:07:47] So we might wanna choose. The depreciation option based on what a tax picture is about. And don’t just think about saving taxes this year. Also, think about the coming years. Are you gonna have massive years that you might not have depreciation for? [00:08:00] Maybe we wanna hold back instead of front loading it this year.
[00:08:02] Maybe we wanna hold back, we’re in a lower income tax bracket and take depreciation later on when we need it more. Or maybe we’re just gonna wait to buy that asset until that high income year. Everyone’s situation’s gonna be a little different, but just make sure you’re thinking about that, running through some of those numbers of what does this do to my tax situation today, but then also what’s my tax situation next year?
[00:08:23] What’s my tax situation tomorrow? And am I making a decision that makes sense for both of those situations? And then next what we’re gonna do is go through an example and some important things to consider when we’re talking about depreciation, but real quick, if you are a business owner and you are tired of guessing when it comes to taxes, we just released a brand new tax savings starter kit and it’s a hundred % free.
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[00:09:04] That’s tax Savings podcast.com. Forward slash starter kit. So let’s get back to depreciation, and I want to go through an example to help put this concept and this idea of depreciation into play so you understand how it works. Let’s say that on February 1st, you purchased a computer for $4,500.
[00:09:23] You purchased one computer with regular depreciation. A computer is considered a five year asset, so you’re gonna take that $4,500 and you’re gonna spread out that expense and take an actual expense over five years. So you’re not gonna get a $4,500 deduction this year. You’re gonna take it spread out over five.
[00:09:41] Separate years, but with the bonus depreciation or with Section 1 79 expensing, you’d be able to take that full $4,500 computer purchase and take it as a full deduction this year. So those are the difference between the methods. Regular depreciation, we’re spreading that expense out over multiple years with bonus depreciation or section 1 79, [00:10:00] we’re taking all of that deduction in this year.
[00:10:03] Let’s go through another example. Let’s say you buy. $300,000 worth of equipment and equipment in this situation. Let’s say it’s seven year equipment, and let’s say you have business income of $200,000. So with regular depreciation, you’re gonna spread out that $300,000 equipment purchase over the course of seven years.
[00:10:23] Now you could take 1 79 expensing up to your business income. So remember you had a $300, $300,000. Cost purchase of these equipment, but you only had business income of 200,000. So if you chose to section 1 7 9 expensing, you’d only be able to take $200,000 up into where you bring your business income to zero.
[00:10:42] The rest you would carry forward, but you could also take bonus depreciation and you could expense the full $300,000 and then use a hundred thousand dollars. That would create that loss. A hundred thousand loss, you could use that loss. To offset other income. Now, you could also do some variation of all those different strategies.
[00:10:59] So [00:11:00] there’s a lot of planning when it comes to depreciation. Again, we just need to understand what are we looking to achieve this year. If I’m generally paying tax in the 10% or maybe 24% tax bracket this year, but I know next year I’m gonna be in the 37%. I might wanna wait if it’s flipped. I know I’m in the 37% tax bracket this year, but I know next year it’s gonna be much lower.
[00:11:20] Let’s try to beef up, let’s try to take advantage of that depreciation this year. So let’s go through some depreciation rules. Number one, rule number one is you gotta be in business. There’s no depreciation until your business actually begins, so you must be an operating business. You can’t depreciate something that is not an operating business.
[00:11:39] Now, if you’re buying equipment for a business that’s not operating yet. Obviously we’re gonna pay for that. We’re gonna record that. Depreciation will start once your business officially opens. Once your officials, the operations actually start. But if you just buy, let’s say you buy a horse farm, it’s all a hobby.
[00:11:54] There’s no business associated with all. There’s no depreciation there. You have to have a real business in order to take [00:12:00] depreciation. And then rule number two is that the asset must be placed in service. In the year that you’re getting depreciation, so if you wanted depreciation in year 2025, you would need to put that asset into service in year 2025.
[00:12:15] And so people say Mike, obviously that makes sense, but let me give you an example that I’ve seen people get caught on before. Let’s say that you go to Best Buy and you buy a computer on December 15th, so you buy a new computer, you pay for that computer, but then you say, oh, I need this software loaded on.
[00:12:29] So you leave it at Best Buy and they’re gonna load this software onto you. All these different add-ons that you specifically need for that computer. And let’s say that you get that computer back on January 10th, so you purchased it on December 15th. You kept it there, they loaded all the software onto it, and then they gave you the computer on January 10th, and that’s when you started to use it in your business.
[00:12:49] Guess what? That asset was not placed into service. In the tax year. It wasn’t placed into service in 2025. It was placed into service January when you actually started using it. [00:13:00] So that’s a great example of something that you maybe paid for but was not placed in service. So just something to think about when we’re going down that route.
[00:13:09] Capitalization Policy
[00:13:09] Mike Jesowshek: Now, one thing that I wanna talk about next is something we call a capitalization policy. And a capitalization policy is something I’m super passionate about because I think that every business owner should have a capitalization policy in place, and it ties in a lot with this idea or this thought of depreciation.
[00:13:25] Basically, a capitalization policy is a simple policy that you put into place in your business where it says that you will immediately expense. Any items, any asset purchases that are under $2,500. So if you purchase an asset that is under $2,500, and that’s a per asset cost, you don’t even have to worry about bonus depreciation.
[00:13:45] You don’t have to worry about section 1 79. You don’t have to worry about regular depreciation. You simply just expense it as an expense. You don’t worry at all about depreciation. This is a gift. This is a tool that the I Risk gives you, but you have to have a capitalization policy in place. [00:14:00] Let’s go through a quick example.
[00:14:01] Let’s say that you bought two computers for $4,000 total. That’s $2,000 per computer. Guess what? It qualifies. Even though your total bill was $4,000, each individual computer, two computers in there was $2,000, which is under the $2,500. Limits that $2,500 is a per item cap. And in that case, two computers for $4,000, $2,000 each.
[00:14:24] If you had a capitalization policy in place, we would never depreciate those at all. We would take a full expense in year one. That is why I say that every business should have one and should be implemented. It. It’s easy to set up. You just gotta do a couple dot your i’s cross your T’s on a couple different things and it can be super powerful and save you a ton of time and record keeping.
[00:14:44] So how do we implement this? How do we put a capitalization policy? In place first, I always say have a written document that you keep on file. Now this isn’t gonna be something that you send to the government, it’s just something that you keep on file that documents. Everything that’s going on within this capitalization policy.
[00:14:59] What [00:15:00] is your cap limit? Write directly on that document what it is that $2,500, what qualifies and when you put it into place, sign it. Keep it on your corporate records. Now, one thing to note about a capitalization policy is that you have to use it for all asset purchase. You can’t pick and choose, so you can’t buy something for 2000 and say, I’m gonna depreciate that and then buy something else for 2000.
[00:15:21] Say, I’m gonna just expense it and use the capitalization policy. Once you have a capitalization policy in place, it has to be used for all assets. But again, that’s very simple. Under $2,500 expense, immediately over $2,500 capitalize and depreciate just as you normally would. So step number one, to implement a capitalization policy, it’s just have a written document on file that outlines that capitalization policy.
[00:15:42] It. And then step number two is make an election on your tax return. It’s called a safe Harbor expensing election. it’s sentence that you add to your tax return that says, yes, I’m taking this safe harbor election. That’s it. And then you just need to follow the process for that.
[00:15:58] Now at Tax Home [00:16:00] we have sample documents that you can just download, sign, implement all this, so it’s easy and smooth and helps you along that process. We have everything to help you with the implementation of that capitalization policy, but again, I’m a strong believer that every single business owner have a capitalization policy in place in their business, so that if you’re buying any asset under $2,500.
[00:16:19] We’re not even worrying about capitalizing or what kind of depreciation we’re gonna, we don’t worry about depreciation. We’re just taking that expense in year one.
[00:16:28] Selling Depreciated Assets
[00:16:28] Mike Jesowshek: Now finally, I wanna wrap up with this concept of depreciated assets and what happens if I sell a depreciated asset? What happens if I sell an asset that I have on my books?
[00:16:39] Basically, if you sell a depreciated asset, you may have a game. Or even a loss on the sale. And first thing you need to do is find out what your basis is in that asset, which in simple terms would be your purchase price, less any depreciation you took. Then your gain in loss would be a sales price. Minus your basis.
[00:16:59] So let’s go [00:17:00] through a quick example to help drive this home and see what it actually means. Let’s say you purchase a computer for $4,500 and let’s say you took bonus depreciation for that. So you’ve got a, took that full bonus depreciation in year one of $4,500. So your basis in that is zero. You bought it for 4,500.
[00:17:18] You took 4,500 depreciation. Your basis is 4,500 minus 4,500 $0 basis. Let’s say that you sold that asset, that computer in year three for $2,000, so you bought it for 4,500. Year three you bought it for, or you sold it for $2,000. Again, your basis in that asset is zero $4,500 purchase price. Minus $4,500 in depreciation is a zero basis, so your gain is gonna be $2,000, which is your sale price, minus your basis.
[00:17:46] 2000 minus zero is 2000, and this gain would be taxable to you. This is what we often refer to as depreciation. Recapture. So just know that if you sell an asset and we’re taking all this depreciation, if you sell an [00:18:00] asset, there is potential for depreciation, recapture, and we need to have documentation of that.
[00:18:04] So we can’t just go out and buy a piece of equipment for a hundred thousand dollars. Take bonus depreciation and then sell it in year two and pay no gain on that. Of course, there’s gonna be a taxable event there if we were to go around and turn around and sell that. So just keep that in mind as you’re thinking about this whole concept of depreciation.
[00:18:21] Remember, depreciation doesn’t have to be complex and honestly, with this one big, beautiful bill, a hundred % bonus depreciation being back increase Section 1 79, expensive being back. These are all great news, great things for business owners, for real estate investors. We just need to make sure that we’re doing it right and understand what options.
[00:18:37] That you have available to you.
[00:18:39] Conclusion and Next Steps
[00:18:39] Mike Jesowshek: Alright, you now have the roadmap. You know why depreciation isn’t just accounting jargon. You understand what a capitalization policy can do for you, and you’ve seen how the rules, especially the a hundred % bonus depreciation and the boosted section 1 79 limits open up major.
[00:18:54] Immediately deducting potential. That’s a huge thing. Most asset purchases you can [00:19:00] deduct 100% in year one. Based on those one big, beautiful bill changes. The next step you need to do is action review your asset purchases and ask, can I expense this now? Should I adopt or update a capitalization policy?
[00:19:12] Talk to your tax advisor about timing. When do you acquire, when you place in service, and how your state rules might differ. For some of the federal rules. And if you found this helpful, don’t forget to hit subscribe. Hit that like button and share it with a business owner who’s sick of paying too much in tax.
[00:19:27] And if you want help from our team of tax professionals implementing capitalization policies, depreciation plans, this along with so many other tax strategies, visit us at Tax Zone, that’s TX ax elm.com or click the link into the description for our free discovery call. We are helping people like you legally lower your tax bill every single day.
[00:19:46] Thanks for coming on, and I’ll see you on the next one.
