Depreciation Basics: Section 179, Bonus, and Straight-Line

Why a $10,000 purchase isn't a $10,000 expense

Buy $200 of office supplies and it's an expense today — simple. Buy a $10,000 machine, though, and accounting treats it very differently: the machine is an asset that will help you earn money for years, so its cost gets spread across those years instead of hitting your books all at once. That spreading is depreciation.

The logic is the matching principle: the cost of something should land on your P&L in the same periods it helps generate revenue. A machine that lasts five years should show up as roughly a fifth of its cost per year, not a single brutal hit in year one. This guide explains the everyday version of how that works — straight-line depreciation — and then the two big tax accelerators owners always ask about: Section 179 and bonus depreciation. (As always: general education, not tax advice.)

What gets depreciated (and what doesn't)

You depreciate fixed assets — things you buy to use in the business over a long period, not to resell:

• Equipment and machinery
• Computers, servers, and office furniture
• Vehicles used for business
• Buildings and major improvements (land itself is not depreciated — it doesn't wear out)

You do not depreciate things you consume quickly (supplies), things you resell (inventory), or anything below your capitalization threshold — a dollar line you set, below which it's simpler to just expense the item. Many small businesses set that line somewhere like $500 or $2,500 so they're not tracking a depreciation schedule for a $90 keyboard. Above the line it's a depreciable asset on the balance sheet; below it, it's a regular expense.

Straight-line: the plain version

Straight-line is the simplest method and the one your financial statements most often use. You spread the cost evenly across the asset's useful life, after subtracting any salvage value (what you expect it to be worth at the end).

Annual depreciation = (cost − salvage value) ÷ useful life

Worked example. You buy a $10,000 machine, expect it to last 5 years, and figure it'll be worth $1,000 as scrap at the end.

• Depreciable base = $10,000 − $1,000 = $9,000
• Annual depreciation = $9,000 ÷ 5 = $1,800 per year

So your P&L shows a $1,800 depreciation expense each year for five years. Meanwhile, on the balance sheet, the machine's book value steps down each year — $10,000, then $8,200, $6,400, and so on — tracking how much value you've "used up." This is exactly the kind of entry a good month-end close records every period so your statements stay honest.

Notice what depreciation does to cash: none. You spent the $10,000 the day you bought the machine. Depreciation is a non-cash expense — it lowers reported profit without any money leaving the account. That's a key reason profit and cash flow diverge, and why a profitable-looking P&L can sit next to a very different bank balance.

Section 179: deduct it now instead of over time

Straight-line is tidy, but waiting five years for the full deduction can be painful when you've spent the cash today. That's what Section 179 is for: it's a tax provision that lets you deduct the full cost of qualifying equipment in the year you put it in service, rather than depreciating it slowly.

The mechanics that matter:

• It applies to most business equipment, machinery, and off-the-shelf software — tangible things you bought and started using this year.
• There's an annual dollar cap on how much you can expense this way, and the benefit phases out once your total equipment purchases for the year get large — it's aimed at small and mid-size businesses, not unlimited buying. The exact cap and phase-out numbers are set by the IRS and change yearly, so look up the current figures rather than trusting an old article.
• Section 179 can't create a tax loss — you can only use it to offset business income. Spend more than you earned and the excess carries forward.

In plain terms: Section 179 is a lever you choose to pull, asset by asset, when deducting now beats deducting later.

Bonus depreciation: the other accelerator

Bonus depreciation is a second way to front-load deductions. Historically it let businesses deduct a large percentage of an asset's cost in year one on top of or instead of the slow schedule. The crucial caveat for any current-year reader: the bonus percentage has been changing. It was 100% for several years and has been stepping down, so the rate that applies to a purchase depends on the year you placed it in service. Do not assume "bonus depreciation = 100%." Confirm the current-year percentage.

How it differs from Section 179 in practice:

• Bonus generally has no annual dollar cap and no income limit — it can create or deepen a loss, unlike 179.
• It typically applies automatically to whole classes of assets unless you elect out, whereas 179 is chosen item by item.
• Many owners use them together: 179 to fine-tune specific assets up to the cap, bonus to handle the rest.

Book vs. tax: why your two depreciation numbers differ

Here's the part that confuses owners most. You may end up with two different depreciation figures: a steady straight-line number on your financial statements (so reports reflect reality and matching), and a much larger, front-loaded number on your tax return (using 179 and bonus to reduce this year's tax). That's normal and expected — your management books and your tax filing are answering different questions.

This is the same book-vs-tax split that shows up in the accrual vs. cash choice: it's common to run accrual, straight-line financials for seeing the business clearly while the tax return takes every legal acceleration to minimize this year's bill. Good software keeps both views from one ledger so you're not maintaining parallel spreadsheets.

The owner's takeaways

• Big, long-lived purchases are assets, not instant expenses — they hit your P&L over time as depreciation.
• Straight-line = cost minus salvage, spread evenly over useful life. Simple, and what your financial statements usually show.
• Section 179 and bonus depreciation are tax tools to pull deductions forward into the current year — powerful, but governed by caps, phase-outs, and percentages that change annually.
• Depreciation is non-cash. It changes profit and tax, never the bank balance.
• Decide major purchases with the tax timing in mind, but never let the tax tail wag the dog — buy equipment because the business needs it, then optimize how you deduct it.

Set your capitalization threshold, record monthly depreciation as part of your close, and bring your equipment list to your preparer at year-end — they'll choose the 179/bonus/straight-line mix that fits your situation.

This article is general information, not tax advice. Depreciation limits, bonus percentages, and Section 179 caps change frequently — confirm the current rules with a qualified tax professional.