Depreciation tax decisions at year-end

As we approach the end of the year, tax professionals should take time to review their clients' depreciation strategies. The depreciation decisions made now can have a significant impact on taxable income, both for the current year and beyond. With recent updates in the One Big Beautiful Bill Act (OBBBA), bonus depreciation and §179 expensing limits changed, making it critical to understand how each election affects current and future tax liabilities.

In this blog, we'll discuss the core depreciation options available to businesses at year-end, how to assess the best choice for your clients and common pitfalls to avoid. We'll also touch on how to prepare for the upcoming 2026 tax year changes.

Key depreciation strategies for year-end planning

As a tax professional, your clients may have several options for handling their depreciable property. Here's an overview of the primary choices:

Expensing property vs. depreciating over time

When a business acquires property, it can generally either expense it immediately or depreciate it over time. Expensing, particularly under §179 or bonus depreciation, enables an immediate deduction. However, the tradeoff is that you miss out on future deductions. On the other hand, depreciating property over its useful life provides a more gradual tax benefit, although you must account for recapture if the asset is sold later.

Pro tip: Expensing property in the current year might make sense if your clients need to reduce taxable income immediately. However, if they expect higher income in future years, depreciation could be the better option for long-term tax planning.

Bonus depreciation

Bonus depreciation allows businesses to immediately write off a significant portion of the cost of qualifying property. For qualified property acquired and placed in service after Jan. 19, 2025, the deduction is 100% with no scheduled phase-out. Property acquired before Jan. 19, 2025, remains under the TCJA phase-down schedule.

Consideration: Anchor planning to the acquisition date. For post-Jan. 19, 2025, acquisitions, model cash flow and taxable income under 100% expensing. For earlier acquisitions, apply the remaining phase-down and compare alternatives to §179 and regular MACRS.

Transitional election: For the first tax year ending after Jan. 19, 2025, taxpayers may make a one-year election to claim reduced bonus rates, including 40% for general qualified property.

Section 179 expensing

Section 179 lets businesses immediately deduct the cost of qualifying property, up to $2.5 million in 2025. The deduction phases out dollar-for-dollar when total eligible purchases exceed $4 million and is fully phased out at $6.5 million. §179 is limited to taxable business income; any excess carries forward.

Pro tip: Use §179 to match taxable income, then consider bonus depreciation for the remaining basis.

Common depreciation pitfalls to avoid

While depreciation offers significant tax savings, tax professionals often encounter common mistakes when advising clients. Being aware of these pitfalls will help you avoid costly errors:

Missed depreciation

Sometimes, businesses fail to claim depreciation in the proper year, either because they forget or because they don't properly track asset placements. This can result in lost deductions and potentially higher taxes in the future.

Solution: Ensure your clients are accurately tracking the dates assets are placed in service. It's crucial to apply the appropriate depreciation method and ensure that all eligible property is being depreciated.

Placed-in-service rules

An asset's placed-in-service date determines when depreciation begins. If assets aren't placed in service by the end of the year, they can't be depreciated for that year. Similarly, the mid-quarter convention may apply if more than 40% of the property is placed in service during the last quarter of the year, which can affect the depreciation calculation.

Solution: Review the timing of asset acquisitions carefully and make sure they are placed in service by the end of the year to take full advantage of depreciation deductions.

Depreciation recapture

When a depreciated asset is sold, you may face depreciation recapture, which requires businesses to pay taxes on the deductions they've previously taken. This can significantly impact the proceeds from a sale, especially if the asset was depreciated using accelerated methods, such as bonus depreciation.

Solution: Always factor in the possibility of depreciation recapture when advising clients on the sale of depreciated assets. Ensure they understand the tax implications before making any decisions.

Preparing for 2026: key legislative changes quick summary

The coming year brings updates to factor into year-end plans:

• Qualified property acquired and placed in service after Jan. 19, 2025, is eligible for 100% bonus depreciation with no scheduled phase-out, while property acquired earlier follows the TCJA phase-down. 
• Section 179 limits have increased for 2025 and will now be indexed for inflation; the maximum deduction is $2.5 million, with a phase-out threshold of $4 million.

Map expected purchases and taxable income so elections support 2026 goals, and brief clients now. Many will choose to time acquisitions to take advantage of 100% expensing or higher §179 limits.

Join us for our upcoming online workshop

Want to dive deeper into depreciation strategies and year-end planning? Register for our upcoming online workshop, Strategic Depreciation Planning for Year-End. In this session, we'll cover everything from the latest legislative changes to practical tips on maximizing deductions for the 2025 tax year. You'll get real-world examples, plus the chance to ask questions and clarify any issues you face with your clients.