How to Depreciate Property and Assets in the USA

Introduction

Depreciation allocates the cost of an asset over its useful life. Instead of taking the entire cost of the asset as a loss at the point of purchase, deprecation spreads the cost over several years. This results in higher profit in the year of purchase, but also higher taxation.

Most assets with a determinable life are depreciated evenly over the time in service. Land is not depreciated.

In the USA, depreciation for tax purposes is typically calculated differently to corporate depreciation. Therefore it is normal to operate two or more accounting books:

• GAAP Depreciation
• Tax Depreciation

xAssets Fixed Asset Management software is designed from the ground up to support this scenario. The software supports multiple books, multiple currencies, multiple companies, and it can accommodate unusual accounting periods such as 4-4-5 and year end changes. The formulae and tables needed to calculate USA tax depreciation are built into the "out of the box" system. You can dive deeper into the xAssets product in the product page and you can read about the specifics of the depreciation engine here.

It is also common for US companies have another accounting book for State Tax since state tax calculations differ from Federal Tax in many states.

Typical recovery periods are shown below

GAAP Depreciation (Financial Reporting)

Companies can use straight-line depreciation under US GAAP. The formula is simple:

Annual depreciation = (Original Value – Salvage value) ÷ Useful life in years

Tax Depreciation – MACRS

Almost all tangible property placed in service after 1986 uses the Modified Accelerated Cost Recovery System (MACRS). Two subsystems exist:

• GDS – General Depreciation System (accelerated, most common)
• ADS – Alternative Depreciation System (straight-line, longer lives, required in some cases)

MACRS Property Classes (GDS)

The IRS 946 document gives about 120 pages of rules and formulae related to MACRS and ACRS. The xAssets product set helps to calculate depreciation within this framework.

Conventions

Bonus Depreciation and Section 179 (2025)

Federal tax laws allow immediate expensing under these rules:

• Section 179 – You can expense up to $1,220,000 (but this starts to phase out at $3,050,000 of purchases)
• Bonus depreciation – 60% immediate deduction on qualified new and used property (2025 rate)

Straight-Line vs 200% Declining Balance

How xAssets Handles US Depreciation

xAssets supports multi-book, multi-company and multi-currency. It supports every IRS method in Publication 946 in two ways:

1. Direct lookup from official IRS MACRS percentage tables (most accurate)
2. Real-time calculation using 200% declining balance with correct half-year, mid-quarter or mid-month conventions

The two options above give the same numbers (with rounding differences), and using the 200% declining balance formulae in xAssets, it is possible to recreate the tables presented in the IRS 946 document.

Support for Unusual Accounting Periods

The system supports companies with unusual accounting periods. Accounting periods can be automatically generated or manually set up. Different companies can have different sets of accounting periods, or many companies can utilise the same set as required.

As well as standard monthly periods, 4-4-5 periods and other unusual setups are supported, the system can allow for financial year adjustments such as extended or shortened financial years.

Manual vs Automated Calculation

Manual MACRS calculations require you to identify class life, recovery period, convention and method for each asset, applying IRS tables year by year, and recalculate results for any changes. That process is repetitive, error-prone and costly to reconcile across federal, state and internal books. Automation applies rules and tables consistently, recalculates when inputs change, and produces an auditable result for multiple books.

State Tax Depreciation

Many U.S. states have depreciation and expensing rules for state income tax that differ from federal rules. The differences most often relate to "bonus depreciation" amd accelerated deductions, and in some cases full divergence in depreciation method.

States with different depreciation rules which are different to Federal rules

California (CA)

California does not permit MACRS for state tax depreciation. Instead it requires a different depreciation method based on economic useful life (an older ADR-style schedule).

The state disallows federal “bonus depreciation” for state income tax. Depreciation must be recalculated under California rules, requiring dual (federal vs state) depreciation tracking.

New York (NY)

New York generally follows MACRS for regular depreciation, but “decouples” from federal bonus depreciation. That means if you claim bonus depreciation federally, you cannot necessarily take the same on your NY state return; the state requires add-back / separate calculation. State depreciation schedule or expensing may differ from the federal schedule under certain rules or classes of property.

Illinois (IL)

Illinois requires an “add-back modification” if federal bonus depreciation under IRC § 168(k) was used. In other words: bonus depreciation on the federal return must be added back; state-level depreciation is recalculated separately. For standard MACRS (non-bonus), Illinois may more closely follow federal rules — but bonus depreciation makes the difference significant.

Pennsylvania (PA)

Pennsylvania decoupled from federal bonus depreciation (particularly for post-TCJA rules). Assets placed in service after certain dates must follow regular depreciation rather than accelerated bonus depreciation. That may result in lower first-year depreciation deductions on state returns compared to federal.

North Carolina (NC)

For certain assets (e.g. production machinery), North Carolina does not conform to federal bonus depreciation. The taxpayer must add back 85% of the bonus depreciation in the year claimed, then deduct 20% of that add-back over the next five years. Regular MACRS depreciation (without bonus) is allowed for state purposes.

Other states / jurisdictions

Some other states have partially or selectively departed from Federal IRS rules — particularly related to bonus depreciation and expensing rules. Historic decoupling is documented for states including Arkansas, Idaho, Georgia, Indiana, Iowa, Massachusetts, Mississippi, Nebraska, Oklahoma, Virginia, and the District of Columbia. State conformity can change over time: what was conforming last year may not be this year (or vice versa).

Conclusion

Accurate depreciation saves tax and ensures clean financial statements. Maintain one accounting book for GAAP and another for federal tax (plus state books if required). xAssets automates every US rule so you stay compliant without spreadsheets.

For full details see IRS Publication 946 – How To Depreciate Property