Depreciation: Maximize Your 2025 Small Business Tax Savings

For many small business owners, depreciation is either a misunderstood concept or one that is overlooked entirely. Some fail to claim valuable deductions, leaving money on the table. Others misapply the rules, risking costly IRS scrutiny and potential penalties. But depreciation is more than an accounting formality. It’s a strategic tool that affects cash flow, tax savings, and even how lenders and investors view your business.

This guide explains how depreciation works, the methods available, new tax law changes for 2025, and the pitfalls to avoid. More importantly, this blog demonstrates how to strategically leverage depreciation to drive growth, not just compliance.

Key Highlights

• Depreciation spreads the cost of business assets over time, creating valuable tax deductions.

• The optimal method depends on your goals: stable write-offs, early cash flow relief, or usage-based deductions.

• The One Big Beautiful Bill Act (OBBBA) of 2025 restored 100% bonus depreciation and expanded Section 179 limits, making 2025 a pivotal year for planning.

• Documentation of asset costs, in-service dates, and methods is crucial for ensuring compliance and effective audit defense.

• Depreciation errors — such as failing to depreciate or using the incorrect basis — can trigger IRS red flags.

• Working with a professional accountant helps maximize savings, reduce audit risk, and map depreciation into a long-term strategy.

How Depreciation Works and Why It Matters for Taxes

At its core, depreciation is the process of allocating the cost of several tangible assets or a single tangible asset over its useful life. Instead of deducting the full purchase price at once, businesses spread it out over time.

Key components of depreciation:

• Asset cost: Includes the purchase price plus expenses such as shipping, installation, and setup.

• Useful life: The period the IRS expects the asset to remain productive. For example, computers may have a five-year life, while buildings may extend 27.5 or 39 years.

• Salvage value: The estimated value of an asset when its useful life concludes, sometimes referred to as scrap value.

From a tax perspective, depreciation reduces taxable income each year, smoothing out deductions while reflecting the asset’s wear and tear. For S corporations and small businesses, selecting the optimal method has a significant impact on both reinvestment and long-term compliance.

Choosing the Right Depreciation Method

Different assets and business strategies call for calculating depreciation differently. These are the most common depreciation methods.

Straight line: Predictable deductions and stability

The straight line method spreads costs evenly across the asset’s life.

Straight line formula: (Asset Cost – Salvage Value) ÷ Useful Life = Annual Depreciation Expense

This method is ideal for business owners who value consistency. For example, if you purchase office furniture for $10,000 with a 10-year life and no salvage value, you’ll deduct $1,000 annually.

Declining balance: Accelerate tax savings early

Accelerated depreciation methods, such as the double declining balance method, allow for larger deductions in the early years. That means more tax savings right after a major purchase, which can significantly improve cash flow.

The double declining balance method is most effective for assets that depreciate rapidly, such as vehicles or technology. However, it requires careful tracking and year-round tax advisory to avoid errors.

Units of production: Best for variable-use assets

Instead of tying depreciation to time, the units of production method, sometimes called the production depreciation method, links it to actual usage — making it valuable for industries like manufacturing and construction. For example, a machine expected to produce 100,000 units over its lifetime might allocate depreciation based on the number of units it produces each year.

This approach better matches expenses to revenue when usage fluctuates.

2025 Tax-Saving Power Tools

Why is 2025 a pivotal year for depreciation? Because of sweeping changes introduced by the OBBBA.

Bonus Depreciation vs. Section 179 at a Glance

Breaking down the "One Big Beautiful Bill Act" of 2025

Effective January 19, 2025, the OBBBA permanently restored 100% bonus depreciation. However, assets placed in service before that date in 2025 remain subject to the previous 40% phase-down for tax purposes.

That makes careful documentation of purchase and in-service dates critical.

Leveraging the expanded Section 179 deduction

Section 179 lets businesses expense qualifying purchases in the year of acquisition. For 2025, the deduction limit increased to $2.5 million, with a phase-out threshold of $4 million.

Unlike bonus depreciation, Section 179 cannot create a tax loss — it’s capped by taxable income. Still, when paired with bonus depreciation, it makes a powerful tax-saving combination for small businesses.

Bonus depreciation vs. Section 179: How to use them together

The general approach is to apply Section 179 first, then use bonus depreciation for any remaining costs. This combination allows businesses to strategically manage taxable income and accelerate deductions.

Professional guidance and 1-800Accountant's full-service tax preparation are crucial for maximizing savings and avoiding the misapplication of these rules.

Depreciation Pitfalls That Trigger IRS Scrutiny

Depreciation mistakes are among the most common IRS audit red flags. Avoid the following errors to help ensure smooth operations. 

Not depreciating assets at all

Forgetting or delaying depreciation reduces deductions.

Using the wrong basis

Failing to include installation or setup costs.

Mixing personal and business property

Claiming depreciation on mixed-use assets without proper allocation.

Poor or missing records

Lack of receipts or service dates can render deductions invalid.

Incorrect method application

Applying an accelerated method where the straight line depreciation method was required.

Failing to account for recapture

When selling an asset, ignoring depreciation recapture can lead to unexpected tax bills.

Maximize Your Depreciation Strategy with Expert Guidance

Depreciation is powerful and complex. With 2025’s tax law changes, the stakes are higher than ever before. However, proper planning can help small businesses:

• Free up cash flow for reinvestment.

• Reduce tax liability while staying compliant.

• Present stronger financials to lenders and investors.

At 1-800Accountant, America's leading virtual accounting firm, our team helps small businesses select the most effective methods, maintain accurate records, and apply new and updated tax rules, such as Section 179 and bonus depreciation. The restoration of 100% bonus depreciation in 2025 creates an unprecedented opportunity to invest and grow.

Ready to maximize your savings? Schedule a free 30-minute consultation with our team to get started.

Frequently Asked Questions (FAQ)

What’s the difference between depreciation for taxes vs. for my books?

Tax depreciation follows IRS rules for deductions, while book depreciation aligns with Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board. A business may use the straight line method for books but the accelerated methods for taxes, creating timing differences.

Can I depreciate land?

No. Land doesn’t wear out or become obsolete, so it is never depreciated. However, land improvements, such as parking lots or fences, may be eligible for depreciation.

What is a cost segregation study?

A cost segregation study reclassifies parts of a building into shorter-lived asset categories, accelerating deductions. For example, lighting and HVAC systems may be depreciated faster than the building itself as a result of a cost segregation study. 

Can I take bonus depreciation on a vehicle?

Yes, if it meets IRS qualifications. However, passenger vehicles are subject to annual deduction caps. Large vehicles used primarily for business may qualify for full expensing.

How do I know if my asset qualifies for depreciation?

Generally, the asset must be owned by your business, used in operations, and have an expected useful life longer than one year to be eligible. Consumables is a particular asset that doesn't qualify.

How do Section 179 and bonus depreciation work together?

Businesses typically apply Section 179 first, up to its limits, and then bonus depreciation for the remaining costs. This process maximizes flexibility.

Can I change depreciation methods after I start using one?

Using the straight line method and switching to the double declining balance depreciation method for a depreciable asset, among other changes, requires IRS approval. It’s best to choose the right accounting method upfront to avoid delays and other issues. 

How does depreciation recapture work when I sell an asset?

If you sell an asset for more than its depreciated value, the IRS may tax part of the gain as ordinary income — this is depreciation recapture.

Do leasehold improvements qualify for depreciation?

Yes, improvements made to leased property, like installing new fixtures, are depreciated over their useful life.

How does the IRS determine “useful life” for different assets?

The IRS provides asset class lives and tables in Publication 946, which guide useful life estimates.

Can software and digital assets be depreciated?

Yes, purchased software, which can be considered intangible assets, can be depreciated or amortized depending on its type. Custom software may qualify for the Section 179 deduction.

How does depreciation affect my taxable income each year?

Each year, depreciation reduces taxable income, lowering the overall tax bill. The method and timing affect the size of deductions.

How do I decide between Section 179 and bonus depreciation for vehicles vs. equipment?

Consider taxable income limits and future cash flow requirements when making a decision. Section 179 may be capped, but bonus depreciation offers unlimited write-offs.

What records should I keep year-round to defend depreciation in an audit?

Maintain invoices, receipts, service dates, and documentation of business use throughout the year to support depreciation during an audit. Strong records are your best defense against IRS scrutiny.

Can I use different depreciation methods for tax vs. financial reporting, and what are the risks?

Yes, but differences create deferred tax items and may confuse stakeholders. Consistency and documentation are crucial when using different methods.