Fixed Assets & Depreciation: Spreading a Purchase Over Its Life
Some purchases are not expenses. Buy a $30,000 van and you have not lost $30,000 — you have swapped cash for something worth roughly the same, which then wears out over years. Depreciation is how that wearing-out becomes a deduction. This guide covers when to capitalize, how long the deduction is spread, and when you can take it all in year one.
Asset or Expense?
The test is not price alone, it is useful life: will this still be doing its job in a year or more? A $400 printer that lasts four years is an asset. $2,000 of consumable stock that is gone in a month is an expense.
- Assets: vehicles, machinery, computers, furniture, buildings, leasehold improvements
- Expenses: supplies, repairs that keep something working rather than improve it, software subscriptions, rent
The repair-versus-improvement line is where most mistakes happen. Replacing a broken part keeps the machine doing what it already did — repair. Replacing the engine so it runs another decade extends its life — improvement, which gets capitalized with the asset.
How Long It Depreciates Over
You do not estimate an asset's life — the IRS assigns it a recovery period by category, and MACRS sets the percentage deductible each year. DynaTax AI applies these tables for you:
| Recovery period | Typical assets |
|---|---|
| 5 years | Vehicles, computers, office equipment |
| 7 years | Office furniture, most machinery |
| 15 years | Land improvements — fencing, paving, landscaping |
| 27.5 years | Residential rental property |
| 39 years | Commercial real estate |
The deduction is not spread evenly. A five-year asset deducts 20% in year one, 32% in year two, then 19.2%, 11.52%, 11.52% and 5.76% — front- loaded on purpose, because equipment loses most of its value early. Real estate is the exception: 27.5- and 39-year property depreciates in equal slices throughout.
Half-Year and Mid-Quarter
Notice the five-year table runs across six years. That is the half-year convention: whatever date you actually bought it, the asset is treated as placed in service at the midpoint of the year, so year one gets half a year's depreciation and the remainder spills into an extra year at the end.
There is an exception with real consequences. If more than 40% of everything you put in service that year arrives in the final quarter, the mid-quarter convention applies instead, and assets are treated as placed in service at the midpoint of their quarter. An asset bought in December then gets a small fraction of a year rather than half of one.
Section 179: All of It Now
Section 179 lets you deduct the full cost of a qualifying asset in the year you place it in service, instead of spreading it. DynaTax AI records this as full expensing rather than running a MACRS schedule.
It is not automatically the better choice, and the reason is worth understanding: a deduction is worth whatever your tax rate is in the year you take it. Taking $50,000 all at once in a low-income year can waste most of it, while the same deduction spread over five profitable years is worth more. Full expensing is a cash-flow decision as much as a tax one.
Annual dollar limits, phase-outs and eligibility rules change year to year, so treat the choice as one to make with your accountant rather than a default.
What It Does to Your Books
Buying an asset does not touch your P&L. Cash goes down, an asset goes up — a balance-sheet swap. What reaches the P&L is the depreciation, a bit each period, as an expense.
This is the single most common source of “why is my profit so high when I have no money?” A year of heavy equipment buying drains the bank account while barely denting reported profit. The cash flow report is where that gap is explained.
Where to Find It
- Business owners: Accounting → Fixed Assets.
- Tax professionals: open the client, then Bookkeeping → Fixed Assets.
Frequently Asked Questions
What does “placed in service” mean?
The date the asset was ready and available for its job — not the date you paid or the date it was delivered. A machine that arrived in November but was not installed until January is placed in service in January.
I bought equipment on finance. What is the asset worth?
The full purchase price, from day one — how you paid for it is a separate matter. The loan is recorded as a liability, and the interest is its own expense. You depreciate the asset, not the payments.
I sold an asset before it finished depreciating.
Then there is a gain or loss to record — sale price against what is left of its value on your books — and selling for more than that remaining value can claw back depreciation you already deducted. Tell your accountant about disposals; they are easy to forget and awkward to fix later.
Do I have to capitalize every small purchase that lasts a year?
In practice most businesses set a threshold below which items are simply expensed, because tracking a $60 asset for five years costs more than the precision is worth. Agree the threshold with your accountant and apply it consistently — consistency is what makes the policy defensible.