It is December 20th, you just bought a $38,000 work truck, and your accountant asks one question: “Did you put it on the books as an asset, or as an expense?” If you are not sure, you are not alone. Fixed assets and depreciation are where many small business owners either leave real tax savings on the table or create a mess that surfaces during an IRS notice or a bank loan review.
This guide explains, in plain English, how fixed assets and depreciation work for US small businesses, how Section 179 and bonus depreciation fit in, and how to keep records that hold up.
What Is a Fixed Asset (and What Isn’t)?
A fixed asset is property your business buys to use over more than one year: vehicles, computers, machinery, furniture, equipment, and improvements to buildings you own. Instead of deducting the whole cost in the year you pay, tax rules generally require you to spread the deduction over the asset’s useful life. That spreading is called depreciation.
Not everything you buy is a fixed asset. A $40 stapler or a $120 monitor is simply an expense. Most bookkeepers set a written capitalization policy, a dollar threshold above which purchases are recorded as assets. The IRS de minimis safe harbor election lets businesses without an applicable financial statement expense items costing $2,500 or less per invoice or item (the limit is $5,000 if you have audited financial statements). Check IRS.gov (Tangible Property Regulations) for the details before relying on it.
How Depreciation Works: The Basics
For tax purposes, most business property is depreciated under MACRS (the Modified Accelerated Cost Recovery System). Each asset is assigned a recovery period. Common examples:
- 5 years: cars, light trucks, computers, and office technology
- 7 years: office furniture and most machinery and equipment
- 15 years: qualified improvement property and land improvements such as parking lots
- 39 years: nonresidential real estate buildings (land itself is never depreciated)
For book purposes (your financial statements), many small businesses use simple straight-line depreciation: cost minus expected salvage value, divided by useful life. A $6,000 laptop-and-equipment setup with a 5-year life and no salvage value gives $1,200 of depreciation expense per year, or $100 per month.
Section 179 and Bonus Depreciation: Deducting Faster
Two provisions let many small businesses deduct most or all of an asset’s cost right away instead of over several years:
Section 179 Expensing
Section 179 lets you elect to expense the cost of qualifying equipment and certain software in the year it is placed in service. Following the 2025 tax legislation, the limit was raised to roughly $2.5 million, phasing out once total purchases exceed roughly $4 million, with figures indexed for inflation each year. The deduction cannot exceed your business taxable income, so it cannot create a loss on its own.
Bonus Depreciation
Bonus depreciation allows an additional first-year deduction on qualifying property. For property acquired after January 19, 2025, the 2025 legislation restored 100% bonus depreciation on a permanent basis. Unlike Section 179, bonus depreciation can create or increase a net operating loss.
Vehicles have special limits. Passenger vehicles under 6,000 pounds are subject to annual “luxury auto” caps, while certain heavy SUVs, trucks, and vans over 6,000 pounds GVWR may qualify for much larger first-year deductions. Business-use percentage matters too: if you use a vehicle 70% for business, only 70% of its cost is depreciable. Always confirm current-year figures in IRS Publication 946 (How to Depreciate Property) or with your CPA.
Should You Take the Big Deduction Now?
Faster is not always better. Consider:
- Current vs. future income. If your income is low this year but expected to rise, spreading depreciation may save more tax later.
- Pass-through owners. A large deduction can lower your personal tax bracket, but it also reduces future deductions for that asset.
- Selling the asset. Depreciation you claimed may be “recaptured” as ordinary income when you sell for more than its remaining tax basis.
- Lenders. Aggressive deductions reduce reported profit, which can affect loan approvals.
How to Record Fixed Assets in Your Books
- Record the purchase to a fixed asset account (for example, Vehicles or Equipment), not to an expense account, at full cost including sales tax, delivery, and installation.
- Keep the invoice, the in-service date, and the vendor details in a digital folder.
- Set up a fixed asset schedule listing each asset, date placed in service, cost, method, life, accumulated depreciation, and net book value.
- Post depreciation monthly or at least annually as a journal entry: debit Depreciation Expense, credit Accumulated Depreciation.
- When you sell or scrap an asset, remove its cost and accumulated depreciation and record any gain or loss.
In QuickBooks Online, fixed assets live under the Fixed Assets account type, with depreciation tracked through journal entries. Xero has a built-in Fixed Assets module that calculates and posts depreciation automatically. Our teams set up both through our QuickBooks and Xero services.
Common Fixed Asset Mistakes
- Expensing everything that looks like equipment and ignoring capitalization rules.
- Forgetting to depreciate at all, leaving a balance sheet that overstates assets.
- Mixing personal and business use of vehicles without a mileage log.
- Depreciating land, or failing to separate land from building cost on a property purchase.
- Never removing sold or disposed assets from the books.
Clean asset records also make your balance sheet more reliable; our online accounting services and bookkeeping services include fixed asset tracking as part of month-end close.
Frequently Asked Questions
What is the difference between book depreciation and tax depreciation?
Book depreciation is for your financial statements and usually uses straight-line over useful life. Tax depreciation follows IRS rules such as MACRS, Section 179, and bonus depreciation. The two often differ, and that difference is tracked as a timing difference.
Can I use Section 179 on a used asset?
Yes. Used equipment generally qualifies for Section 179 if it is new to you and bought from an unrelated party. Always confirm eligibility for your specific situation.
Do I need to depreciate if I take the full deduction in year one?
No further tax depreciation is taken on that asset, but you still keep it on your fixed asset schedule until it is sold or disposed of, and you may still track book depreciation.
When should I talk to a CPA about a big purchase?
Ideally before you buy, and certainly before year-end. The in-service date, not the order date, generally determines which tax year the deduction lands in.
This article is general information for US small businesses and is not tax or legal advice. Depreciation limits change, so consult a CPA or tax professional about your situation.
Get Your Fixed Assets Set Up Correctly
If your asset records are incomplete, or you are planning a major equipment purchase before year-end, we can help. See our pricing or contact Ask For CPA today for a free consultation, and explore all our services.
