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Equipment and fixed-asset depreciation

Construction companies live on iron, trucks, and tools. Book depreciation drives your financial statements and internal job costing; tax depreciation (MACRS, Section 179, and the special depreciation allowance—often called bonus) drives your return. Those numbers are often different on purpose.

Not tax or audit advice

This guide explains concepts and common contractor fact patterns. Limits and percentages change—verify your tax year against IRS Publication 946 and Form 4562 instructions, and confirm every number with your CPA. State tax rules often do not match federal bonus or Section 179—verify state conformity separately.

Why book and tax depreciation differ​

  • Book (financial reporting): Matches economic use of the asset over its useful life, using a method your policy selects (often straight-line). Used for the balance sheet (net book value), profit-and-loss depreciation expense, bonding, banking, and internal equipment rates charged to jobs.
  • Tax: Uses statutory rules (MACRS class lives, conventions, Section 179, special depreciation allowance). Optimizes timing of deductions and may bear little resemblance to book expense in early years.

Keeping a fixed-asset schedule that shows cost, accumulated depreciation, method, and in-service date is how you support both sets of numbers.

For account mapping, see Chart of accounts and Financial statements.

Deferred taxes (ASC 740): If you prepare GAAP financial statements (many bonded contractors and C corporations), book vs tax depreciation creates temporary differences that may require deferred tax accounting on the balance sheet. That mechanics layer is beyond this page—have your CPA or auditor align the fixed-asset ledger with the tax return and the audit file.

Book depreciation (internal and GAAP-style)​

Basis and capitalization​

Depreciable basis is usually purchase price plus costs required to place the asset in service (freight, installation, sales tax if not recovered). Rebates and trade-in credit reduce basis. Your capitalization policy (minimum dollar amount, asset classes) determines what hits the fixed-asset ledger versus expense.

Land is not depreciated. Land improvements may be separate from land and may have a different life (classification is fact-specific—confirm with your CPA).

Salvage value and useful life​

Salvage (residual) is the expected value at the end of the useful life; it can be zero. Useful life is an estimate. If circumstances change, GAAP treats a change in estimate prospectively (from the change date forward)—you do not restate prior periods.

Partial years (stub periods)​

Many companies prorate the first and last year of book depreciation by months or days. Schedules that assume full fiscal years are simpler but may not match your policy—align software defaults with what your CPA approves.

Methods (common in construction software)​

Straight-line

Annual depreciation = (Cost − Salvage) ÷ Useful life in years.

Declining balance (200% of straight-line)

Each year, a common implementation applies 200% of the straight-line rate to beginning book value, but uses the larger of that amount and straight-line on the remaining depreciable basis over remaining life (so the schedule switches when straight-line would recover the asset faster). Depreciation stops at salvage. This matches how many systems (including industry tools) avoid getting “stuck” with tiny tail balances.

Sum-of-the-years’-digits

For year t (from 1 to n), fraction = remaining life ÷ (1 + 2 + … + n) = remaining life ÷ (n(n+1)/2), applied to (Cost − Salvage). Last year often absorbs rounding.

None / track cost only

Used for non-depreciable items, or when you only want a cost record without book expense.

Impairment and early retirement: If an asset’s recoverable value falls below book value, impairment (when applicable) or retirement can change carrying amount independent of the depreciation schedule—your policy and GAAP rules govern when to stop depreciating or write assets down.

Tax depreciation — federal overview​

MACRS classes (examples contractors see)​

Recovery periods depend on asset class, not on how long you think the machine will last. Common GDS classes (illustrative only—classification is fact-specific):

Class (years)Examples (general)
3Some specialized short-life property (fact-specific)
5Heavy equipment, forklifts, many vehicles, computers
7Office furniture, some machinery, tools (depending on facts)
10Certain longer-lived equipment (e.g. vessels, barges—verify)
15Certain land improvements and qualified improvement property—not all grading or “dirt work” (classification is fact-specific)
20Farm buildings and other 20-year GDS property (uncommon for typical GC fleet)
27.5 / 39Residential rental / nonresidential real property

Software and tax prep tools often use the same class-life list (3 through 39-year). Your CPA classifies each asset; do not assume every improvement is 15-year property.

ADS (alternative depreciation system) applies in specific situations (certain farm, foreign-use, or when elected or required). ADS also affects eligibility for some incentives—your CPA decides.

Conventions​

  • Half-year: Default for much personal property—half a year of depreciation in the year placed in service regardless of month (unless mid-quarter applies).
  • Mid-quarter: If more than 40% of the total depreciable basis of MACRS personal property you placed in service during the year was placed in service in the fourth quarter, you generally must use the mid-quarter convention for that personal property for that year. This is a classic December equipment-buy trap when a large portion of annual capex lands in Q4.
  • Mid-month: Generally real property.

Always confirm on Form 4562 / software; rules exclude certain property types from the numerator or denominator.

Ordering: Section 179 → special allowance → MACRS​

A typical order for qualifying tangible property:

  1. Reduce basis by Section 179 expense (subject to dollar limits, phase-out, taxable income from active trades or businesses, and other rules).
  2. Apply the special depreciation allowance (“bonus”) to eligible remaining basis if you do not elect out.
  3. Depreciate the remaining basis under MACRS.

Used property may qualify for bonus under current law in many cases, but acquisition date, related-party rules, and exceptions matter—see Pub. 946 Chapter 3.

Section 179 (high level)​

For tax years beginning in 2026, IRS guidance states a maximum Section 179 expense deduction of $2,560,000, with the dollar limit reduced by the amount by which Section 179 property placed in service during the year exceeds $4,090,000. There is also a lower cap for heavy sport utility vehicles placed in service in 2026 ($32,000). These figures are indexed over time—always confirm the year you file.

Section 179 generally cannot exceed aggregate taxable income from the active conduct of trades or businesses (with ordering rules for wages and other items); excess may carry forward.

Business-use percentage: For mixed-use assets, Section 179 and depreciation generally apply only to the business portion—documentation matters, especially for vehicles.

Special depreciation allowance (“bonus”)​

After the Tax Cuts and Jobs Act and later legislation including P.L. 119-21 (One Big Beautiful Bill Act), the percentage (including 100% for certain property acquired after January 19, 2025) depends on when property was acquired, when it was placed in service, property type, and elections (including electing out or electing reduced allowances in some cases). There is no single percentage that applies to every contractor purchase in a given calendar year.

Practical takeaway: Model scenarios with your CPA using actual purchase contracts and in-service dates, not blog summaries.

Listed property and luxury automobiles​

Passenger autos and certain other listed property face stricter limits, heavy recordkeeping, and business-use percentage tests. Light trucks and vans may still trigger limits. See Pub. 946 and Pub. 463.

Construction-specific bridges​

Placed in service vs purchased​

Tax and book often key off placed in service (ready and available for intended use), not the invoice date or loan funding date. Document the in-service date for major assets.

Job costing vs the general ledger​

Equipment depreciation on the fixed-asset schedule may not equal the amount allocated to one job in your job-cost system. Many contractors use internal rental rates or hourly machine rates that bundle depreciation, repairs, insurance, and overhead. Keep the asset register reconcilable to the balance sheet; keep job cost methodology documented.

UNICAP and long-term contracts​

Section 263A (UNICAP) and percentage-of-completion accounting can affect when equipment costs flow through COGS versus balance sheet. If you are subject to these rules, your CPA integrates them with depreciation policy.

Disposals, sales, and character of gain​

When you sell, scrap, or trade equipment:

  • Amount realized − adjusted basis = gain or loss for book (basis is usually cost less accumulated book depreciation, subject to impairment or other adjustments).
  • For federal income tax, Section 1245 generally recaptures depreciation (including Section 179 and allowable special allowance) as ordinary income up to the amount of gain—before any residual may be capital gain. This is not optional; it is why disposal planning matters.

Like-kind exchange (Section 1031) after 2017 applies only to real property; equipment trades are generally taxable unless another non-recognition provision applies.

Report business equipment dispositions on Form 4797 (and related worksheets); any residual capital gain after recapture may also tie to Schedule D depending on facts. Your preparer routes amounts to the correct forms.

Schedules, records, and audits​

  • General ledger: Asset cost in fixed-asset accounts, accumulated depreciation as a contra-asset, and periodic depreciation expense to overhead or job cost per your policy—see Chart of accounts.
  • Audit trail: Retain purchase agreements, loan closing detail, invoices that prove placed-in-service date, modification invoices, disposal bills of sale, and trade-in worksheets.
  • CPA / lender packages: Export or print depreciation schedules and asset listings annually so the tax return, financial statements, and fixed-asset subledger reconcile.

Fleet rollups, projections, and lenders​

Aggregating remaining book value, annual depreciation expense, and replacement capital helps with:

  • Surety and bank packages (net worth, working capital, debt schedules)
  • CapEx planning and replacement reserves
  • Insurance and sale discussions (book value ≠ market value)

Fixed-asset data quality checklist​

Use this whether you use spreadsheets or software:

  • Purchase cost recorded for every depreciable unit you track
  • Useful life and method set (or explicit policy for “track cost only”)
  • Placed-in-service date (and purchase date if different) documented
  • Salvage reasonable and less than cost (unless policy says otherwise)
  • No future in-service dates unless the asset truly is not yet in use
  • MACRS class / convention (or tax software mapping) if you produce tax schedules
  • Business-use % documented for mixed-use vehicles
  • Disposal date, proceeds, and expense removed from active schedule when sold or scrapped
  • Reconciliation of fixed-asset module to GL at least annually
  • Method “none” only where intentional (land, non-depreciable, or policy); otherwise book depreciation will not run

Edge-case index (skim)​

  • Short tax year (first/last year): proration rules differ—CPA required.
  • Partnerships / S corporations: Section 179 and other items pass through; owner-level limits can block deduction even if the entity shows income.
  • Personal use of company equipment: reduces depreciation and invites listed-property rules.
  • Idle equipment: Book depreciation often continues while the asset is idle unless impaired or held for sale—confirm with your policy and CPA.
  • Componentization (major inspections, engines): larger contractors may capitalize and depreciate components separately under GAAP.
  • Partial dispositions (GAAP): rules exist for retiring part of an asset without disposing of the whole.
  • Installment sales and related-party sales: special basis and recognition rules.
  • Government grants, credits, and rebates: May reduce basis or affect timing—coordinate with tax and book treatment (e.g. energy property, §48, §45Y)—CPA required.

Alignment with common software labels​

Many construction systems use the same book method names: Straight Line, Declining Balance (Double) (often with an automatic switch to straight-line on the remaining basis when it yields more depreciation), Sum of Years Digits, and None (track cost without book depreciation). Tax tabs may add MACRS class, convention, Section 179, and bonus inputs—those drive tax schedules, not necessarily the book schedule.

Limits and law change. Cite IRS Publication 946 for authoritative federal depreciation guidance.

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