REG, Regulation

Sources for Cost Recovery: Depreciation and Amortization

Last reviewed 2026-09-14

The standards and authorities behind PocketCPA's REG lessons on Cost Recovery: Depreciation and Amortization. The topic rests on IRC Secs. 168, 179, 197.

About this topic

A business that buys a delivery truck does not deduct the price in the year it buys it. It writes the cost off across the years the truck is used instead. Businesses recover the cost of long-lived assets over time through depreciation and amortization rather than deducting the whole cost at once. Which system applies turns on the nature of the asset.

This lesson runs the chain end to end. The exam tests both halves, and candidates who learn only the front half lose the disposition questions.

Key points

MACRS is the required depreciation method for tax purposes, using prescribed recovery periods and conventions.
The Sec. 179 deduction allows immediate expensing of qualifying property up to the annual dollar limit.
Bonus depreciation under Sec. 168(k) allows 100% first-year expensing for qualifying property placed in service.
The half-year convention assumes property is placed in service at the midpoint of the year; the mid-quarter applies if more than 40% is placed in service in the fourth quarter.

What the lessons cover

MACRS: the default for tangible property (Sec. 168)
Section 179 expensing and bonus depreciation (Sec. 168(k))
Listed property and the predominant-use test (Sec. 280F)
Amortizing intangibles (Sec. 197)
Depreciation recapture on disposition: Sec. 1245 and the recomputed-basis ceiling
Real property on disposition: Sec. 1250, the 25 percent bucket, and Sec. 291
Section 1231 netting, the casualty pot, and the five-year lookback
Two provisions that outrun recapture: Sec. 1239 and Sec. 453(i)

Authoritative references

Where these rules sit in the Code.

Sec. 168(a), (b), (c), (d) and (e) carry the MACRS machinery. Sec. 168(a) names the three inputs. Sec. 168(b)(1) sets 200 percent declining balance with a switch to straight line, and Sec. 168(b)(2)(A) substitutes 150 percent for 15-year and 20-year property. Sec. 168(b)(3) forces straight line on nonresidential real property, residential rental property and qualified improvement property, and Sec. 168(b)(4) sets salvage value to zero. Sec. 168(c) is the recovery-period table, including 27.5 and 39 years. Sec. 168(d)(1) is the half-year default and Sec. 168(d)(2) the mid-month convention for the three realty categories. Sec. 168(d)(3)(A) is the 40 percent mid-quarter test with the Sec. 168(d)(3)(B) exclusions, and Sec. 168(d)(4) the three definitions. Sec. 168(e)(1) is the class-life table and Sec. 168(e)(2)(A)(i) the 80 percent residential-rental test. Sec. 168(e)(3)(C)(v) is the no-class-life residual into 7-year property, Sec. 168(e)(3)(E)(vii) puts qualified improvement property into 15-year property, and Sec. 168(e)(6) is its definition and exclusions.
Sec. 168(g) is the alternative depreciation system. Sec. 168(g)(1) lists what is forced onto it, and Sec. 168(g)(2)(A) requires straight line without salvage value. Sec. 168(g)(2)(B) keeps the Sec. 168(d) convention. Sec. 168(g)(2)(C) supplies the recovery periods: class life generally, 12 years for personal property with no class life, 30 for residential rental, and 40 for nonresidential real. Sec. 168(g)(7) is the irrevocable election.
Sec. 168(k) is bonus depreciation. Sec. 168(k)(1)(A) sets 100 percent and Sec. 168(k)(1)(B) reduces basis by it before any other depreciation. Sec. 168(k)(2)(A)(i)(I) caps eligibility at a 20-year recovery period, and Sec. 168(k)(2)(A)(ii) with Sec. 168(k)(2)(E)(i) admits used property the taxpayer never used. Sec. 168(k)(2)(D) excludes ADS property determined after Sec. 280F(b), and Sec. 168(k)(2)(F)(i) adds 8,000 to the first-year Sec. 280F(a)(1)(A)(i) cap. Sec. 168(k)(7) is the class-by-class election out, revocable only with the Secretary's consent. Sec. 168(k)(9) excludes regulated utility and floor-plan-financing businesses, and Sec. 168(k)(10)(A) is the transitional 40 or 60 percent election. Sec. 168(k)(6) and (k)(8) are repealed by Pub. L. 119-21, Sec. 70301(b)(1)(B), and the placed-in-service cutoff formerly at Sec. 168(k)(2)(A)(iii) was struck by Sec. 70301(a)(1). Pub. L. 119-21, Sec. 70301(c) carries the effective dates: (c)(1) property acquired after January 19, 2025, (c)(3) taxable years ending after that date for the transitional election, and (c)(4) the written-binding-contract acquisition rule.
Sec. 168(n) is qualified production property. Sec. 168(n)(1)(A) gives 100 percent, and Sec. 168(n)(2)(A) sets the seven requirements, including the construction window and the January 1, 2031 placed-in-service date, and denies lessee use. Sec. 168(n)(2)(C) excludes office, lodging, parking, sales, research, software and engineering space. Sec. 168(n)(5) is the 10-year change-of-use recapture through Sec. 1245, and Sec. 168(n)(6)(B) makes the election nearly irrevocable. Added by Pub. L. 119-21, Sec. 70307(a), effective for property placed in service after July 4, 2025 under Sec. 70307(c).
Sec. 179 is the expensing election. Sec. 179(a) is the election, Sec. 179(b)(1) the 2,500,000 ceiling, and Sec. 179(b)(2) the reduction above 4,000,000. Sec. 179(b)(3)(A) is the active-business taxable-income limit, with Sec. 179(b)(3)(B) the carryforward and Sec. 179(b)(3)(C) the without-regard-to-Sec.-179 computation. Sec. 179(b)(4) is the married-filing-separately rule, Sec. 179(b)(5) the sport utility vehicle cap with its Sec. 179(b)(5)(B) definition and exclusions, and Sec. 179(b)(6) the indexing. Sec. 179(d)(1) defines Sec. 179 property, and Sec. 179(d)(2) defines purchase and narrows the Sec. 267(c)(4) family. Sec. 179(d)(4) excludes estates and trusts, Sec. 179(d)(8) applies the limits at both the entity and owner level, and Sec. 179(e) defines qualified real property. The 2,500,000 and 4,000,000 figures were set by Pub. L. 119-21, Sec. 70306(a).
Sec. 280F limits listed property. Sec. 280F(a)(1)(A) sets the four annual passenger-automobile ceilings, and Sec. 280F(a)(1)(B) releases unrecovered basis after the recovery period subject to its own annual cap. Sec. 280F(a)(2) applies subsection (a) before subsection (b) and before any personal-use reduction. Sec. 280F(b)(1) forces Sec. 168(g), Sec. 280F(b)(2) recaptures excess depreciation on a later failure, and Sec. 280F(b)(3) sets the predominant-use test at more than 50 percent. Sec. 280F(d)(1) subjects Sec. 179 to the same limits, and Sec. 280F(d)(3)(A) restricts employee use. Sec. 280F(d)(4)(A) lists the four listed-property categories, computers having been struck by Pub. L. 115-97, Sec. 13202(b). Sec. 280F(d)(5)(A) defines passenger automobile with the gross-vehicle-weight substitution for trucks and vans, Sec. 280F(d)(6) defines qualified business use, and Sec. 280F(d)(7) indexes the subsection (a) amounts.
Sec. 197 amortizes intangibles. Sec. 197(a) is the 15-year, month-of-acquisition rule and Sec. 197(b) forbids any other recovery. Sec. 197(c)(1) and (c)(2) define what is amortizable, with the self-created exclusion carved back for Sec. 197(d)(1)(D), (E) and (F). Sec. 197(d)(1) lists the intangibles, and Sec. 197(d)(2) and (d)(3) define customer-based and supplier-based intangibles. Sec. 197(e)(1) through (e)(7) list the seven exclusions, including land and off-the-shelf software. Sec. 197(f)(1)(A) is the no-loss-with-retention rule, Sec. 197(f)(1)(B) the covenant backstop, and Sec. 197(f)(2) the carryover-basis step-in. Sec. 197(f)(3) is the capital-account rule for covenant payments, Sec. 197(f)(4)(B) the renewal rule, and Sec. 197(f)(7) the treatment as depreciable property that pulls Sec. 1245 in.
Sec. 1245 recaptures personal-property cost recovery. Sec. 1245(a)(1) is the lower-of formula, and Sec. 1245(a)(2)(A) defines recomputed basis using depreciation allowed or allowable to the taxpayer or any other person. Sec. 1245(a)(2)(B) permits the smaller allowed amount on adequate records, and Sec. 1245(a)(2)(C) adds back Sec. 179. Sec. 1245(a)(3) defines Sec. 1245 property including, at Sec. 1245(a)(3)(G), qualified production property. Sec. 1245(b)(1) through (b)(4) and (b)(8) are the exceptions and caps, and Sec. 1245(d) makes the section apply notwithstanding any other provision of the subtitle.
Sec. 1250 and Sec. 1(h)(6) handle realty. Sec. 1250(c) defines Sec. 1250 property, and Sec. 1250(a)(1)(A) applies the applicable percentage to the lower of additional depreciation or the excess of amount realized over adjusted basis. Sec. 1250(a)(1)(B)(v) sets that percentage at 100 percent for ordinary Sec. 1250 property, and Sec. 1250(b)(1) defines additional depreciation as the excess over straight line for property held more than one year. Sec. 1250(a)(5) cross-references Sec. 291(a)(1), and Sec. 1250(d)(1) exempts gifts. Sec. 1(h)(6)(A)(i) defines unrecaptured section 1250 gain by rerunning Sec. 1250 with all depreciation and a 100 percent percentage. Sec. 1(h)(6)(B) caps the Sec. 1231-sourced amount at net Sec. 1231 gain, Sec. 1(h)(1)(E) sets the 25 percent rate, and Sec. 1(h)(8) allocates Sec. 1231(c) amounts among the categories.
Sec. 291(a)(1) is the corporate add-on: 20 percent of the excess of the amount that would be ordinary if the property were Sec. 1245 property over the amount ordinary under Sec. 1250 without regard to Sec. 291, treated as ordinary income under Sec. 1250 and recognized notwithstanding any other provision.
Sec. 1231 nets business-property gains and losses. Sec. 1231(a)(1) and (a)(2) are the two branches, and Sec. 1231(a)(3) defines Sec. 1231 gains and losses including involuntary conversions. Sec. 1231(a)(4)(A)(ii) removes Sec. 1211 from the loss computation, Sec. 1231(a)(4)(B) treats uninsured destruction as an involuntary conversion, and Sec. 1231(a)(4)(C) is the casualty and theft sub-netting. Sec. 1231(b)(1) defines property used in the trade or business with its four exclusions. Sec. 1231(b)(3) sets the 24-month and 12-month livestock periods and excludes poultry, and Sec. 1231(b)(4) covers unharvested crops. Sec. 1231(c)(1) through (c)(4) run the five-year lookback and define its terms.
Sec. 1239 makes related-party gain ordinary. Sec. 1239(a) is the character override keyed to depreciability in the transferee's hands, and Sec. 1239(b) lists related persons. Sec. 1239(c)(1) defines controlled entity at more than 50 percent of value or of capital or profits interest, and Sec. 1239(c)(2) applies constructive ownership rules similar to Sec. 267(c) other than paragraph (3). Sec. 1239(d) adds employers and welfare benefit funds, and Sec. 1239(e) treats a patent application as depreciable property.
Sec. 453(i) front-loads recapture on an installment sale. Sec. 453(i)(1)(A) recognizes recapture income in the year of disposition notwithstanding Sec. 453(a), and Sec. 453(i)(1)(B) leaves the excess on the installment method. Sec. 453(i)(2) measures recapture income as the amount that would be ordinary under Sec. 1245 or 1250 if all payments to be received were received in the year of disposition.
Sec. 167(a) is the underlying depreciation allowance for property used in a trade or business or held for the production of income, and Sec. 167(b) points to Sec. 168 for property that section covers. Sec. 1016(a)(2) is the basis adjustment that makes recapture arithmetic work, reducing basis for exhaustion, wear and tear, obsolescence, amortization and depletion to the extent allowed.

Exam trap. Read Sec. 1245(a)(1)(A) and (B) in the order the statute writes them. The test is the lower of recomputed basis and amount realized, so recomputed basis is a ceiling. Candidates who take the higher figure produce ordinary income exceeding the realized gain, which the statute cannot do.

Exam trap. Sec. 1245 applies only to gain. An asset sold at a loss has no recapture, no matter how much depreciation it absorbed, and that loss goes straight into the Sec. 1231 pool.

Exam trap. Sec. 1245(a)(2)(C) treats Sec. 179 as amortization for the add-back. An asset with 60,000 of Sec. 179 and 21,000 of MACRS on a 96,000 cost has a recomputed basis of 15,000 + 60,000 + 21,000 = 96,000, not 15,000 + 21,000 = 36,000.

Exam trap. Sec. 1245(d) makes the section apply notwithstanding any other provision of this subtitle, so recapture is computed and removed before Sec. 1231 netting begins. A candidate who nets first and characterizes second will misallocate every dollar in a mixed year.

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.