Figures: tax year 2026
A machine arrives in November, sits in a crate until January, and the staff preparer deducts a full year of depreciation. The date a deduction begins is decided by service, not by delivery.
Cost recovery converts capitalized basis into deductions across a statutory life. A preparer fixes five inputs before any rate is applied.
- Depreciable basis: the adjusted basis allocable to the depreciable asset, excluding land and excluding personal-use portions.
- Recovery period: the statutory class life assigned to the property type.
- Method: the declining balance or straight-line pattern prescribed for that class.
- Convention: the assumed service date within the year.
- Placed-in-service date: the point at which the property is ready and available for its assigned use.
Land is never depreciable. Where a closing statement supplies one price for land and building, the allocation between them controls how much basis enters the schedule at all.
The recovery clock starts on placement in service, not on payment or on delivery. Supporting documentation resolves the three dates that examiners confuse.
Common mistakes
- Depreciating land. Land allocated $60,000 at closing carries no recovery; only the $275,000 building enters the schedule.
- Full year on real property. An April rental start yields 8.5 months under mid-month, so $10,000 becomes $7,083.
- Testing at exactly 40%. A $40,000 fourth-quarter share of $100,000 keeps the half-year convention; the statute requires more than 40%.
Bottom line
- Cost recovery needs five inputs: depreciable basis, recovery period, method, convention and the placed-in-service date; land is never depreciable.
- Computers are five-year property, office furniture seven-year, land improvements fifteen-year at 150% declining balance, qualified improvement property fifteen-year straight-line, residential rental 27.5-year, nonresidential real 39-year.
- Mid-quarter is mandatory when fourth-quarter personal-property placements exceed 40% of the year's total, measured after expensing and before bonus.
- Elected expensing runs the annual $2,560,000 (2026) ceiling, the $4,090,000 (2026) investment phase-out and the business income ceiling; only the income limit carries forward.
Exam shortcut
Read the service dates before the dollar amounts. A December delivery with a January installation is a Year 2 asset, and a stem that names a quarter is usually testing the mid-quarter trip. Run the limits in one fixed order: expensing first, then bonus on what remains, then the table rate on what is left, then the income ceiling last.
The full lesson (about 5,883 words, 39 min read) adds 6 worked examples, all 8 common mistakes, a self-check, free in the app.
Learning objectives
- III.B1
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