The real test on EA exam depreciation questions is not whether you know the formulas, but whether you can apply them in the correct order. Most candidates fail by calculating MACRS before accounting for special deductions, leading to a completely wrong answer that looks deceptively correct.
For the 2026 EA exam, you must calculate depreciation in a strict three-step sequence: 1) Section 179 expensing, 2) 20% Bonus Depreciation under IRC §168(k), and 3) regular MACRS depreciation on the remaining basis. This hierarchy is the most heavily tested aspect of depreciation on SEE Part 2, Business Taxation.
Key facts
- Governing Code: Internal Revenue Code (IRC) §167, §168 (MACRS), §179, §197.
- Primary Exam Section: SEE Part 2 (Business Taxation).
- 2026 Bonus Depreciation: 20% for qualifying property (phasing down from 40% in 2025).
- Key Conventions: Half-year (default), Mid-quarter (if >40% of assets placed in service in Q4), Mid-month (for real property).
- Intangible Amortization: IRC §197 mandates a 15-year straight-line recovery period.
- Official Guidance: IRS Publication 946, "How To Depreciate Property".
What Is Depreciation and Why Is It a Judgment Test on the EA Exam?
Depreciation is the systematic deduction of a tangible asset's cost over its useful life, governed by IRC §168 (MACRS). Amortization does the same for intangible assets, typically under IRC §197. On the EA exam, these are not simple accounting exercises; they are tests of your judgment and ability to navigate a complex hierarchy of rules.You will face these questions primarily on SEE Part 2, Business Taxation. The examiners design questions to see if you can do more than just look up a rate in a table. They want to know if you can identify the asset type, select the correct recovery period, apply the right convention, and—most importantly—apply special deductions in the correct sequence.
A candidate who memorizes MACRS tables but doesn't understand the interplay with Section 179 and Bonus Depreciation will consistently choose the wrong answer. The exam isn't testing your memory of the 7-year property depreciation rate.
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It’s testing whether you know to apply Section 179 and Bonus before you even touch that rate.
How Do Section 179 and Bonus Depreciation Interact?
You must apply Section 179 and Bonus Depreciation in the correct order, as they reduce the asset's basis before regular MACRS is calculated. Think of it as a waterfall: the original cost flows through Section 179 first, then Bonus, and only the remainder is depreciated via MACRS. Section 179 Expensing allows a business to elect to expense the cost of qualifying property in the year it's placed in service. This is an election, not a requirement. It's subject to annual dollar limits and phase-outs. For 2024 (the latest official figures from the IRS, which are indexed for inflation annually), the maximum deduction was $1,220,000, phased out for property purchases over $3,050,000. It is also limited to the business's taxable income. Bonus Depreciation (IRC §168(k)) is an additional first-year depreciation allowance that is applied automatically unless the taxpayer elects out. For property placed in service in 2026, the rate is 20%. This rate is part of a scheduled phase-out (it was 100% before 2023). It applies to new and used property with a recovery period of 20 years or less.Here is how they compare:
| Feature | Section 179 Expensing | Bonus Depreciation (2026) |
|---|---|---|
| Calculation Order | Step 1: Applied before Bonus and MACRS. | Step 2: Applied after Section 179, before MACRS. |
| Annual Limit | Yes (e.g., $1,220,000 for 2024, inflation-adjusted). | No annual dollar limit. |
| Income Limitation | Yes, limited to net income from active business. | No, can create or increase a Net Operating Loss (NOL). |
| Property Type | Primarily tangible personal property and QIP. | Property with a recovery period of 20 years or less. |
| Application | Elective. You choose which assets to apply it to. | Automatic. You must formally elect out if you don't want it. |
| Creates a Loss? | No. Deduction cannot exceed business taxable income. | Yes. Can create or increase an NOL. |
The most common trap is seeing a large asset purchase and immediately calculating 20% bonus depreciation. You must first check if the taxpayer elects Section 179, apply that deduction, and only then calculate the 20% bonus on the remaining basis.
What Are the Core MACRS Rules for EA Part 2?
After applying any Section 179 and bonus depreciation, the remaining basis is depreciated using the Modified Accelerated Cost Recovery System (MACRS). This requires knowing the property's class, the applicable convention, and the depreciation method.MACRS Recovery Periods for Personal Property
The exam expects you to know the recovery periods for common business assets. Misclassifying an asset is an easy way to lose points.| Property Type | GDS Recovery Period |
|---|---|
| Computers, light-duty trucks, rental cars | 5 years |
| Office furniture, fixtures, equipment | 7 years |
| Agricultural machinery, railroad track | 7 years |
| Qualified Improvement Property (QIP) | 15 years |
MACRS Conventions
The convention determines how much of a full year's depreciation you can take in the year an asset is placed in service or disposed of.- Half-Year Convention: The default for personal property. Treats all property as placed in service in the middle of the year, allowing a half-year of depreciation.
- Mid-Quarter Convention: This is a major trap. It is required for all personal property if more than 40% of the total basis of such property is placed in service during the last three months of the tax year. If triggered, assets are depreciated from the midpoint of their respective quarters.
- Mid-Month Convention: Applies only to real property. Treats all real property as placed in service in the middle of the month, regardless of the actual day.
Real Property Recovery
Real property uses the straight-line method over longer recovery periods.- Residential Rental Property: 27.5 years (e.g., apartment buildings).
- Nonresidential Real Property: 39 years (e.g., office buildings, warehouses).
These assets are never eligible for Section 179 or bonus depreciation, with the crucial exception of Qualified Improvement Property (QIP), which is treated as 15-year property and is eligible for both.
Walkthrough: A Realistic Depreciation Calculation for the EA Exam
Let's apply these rules to a multi-asset scenario you might see on the exam. Scenario: Zenith Corp., a calendar-year taxpayer, placed the following new assets in service during 2026. The company's taxable income before these deductions is $300,000. For this problem, assume the Section 179 limits are the same as 2024 ($1,220,000 max, $3,050,000 phase-out).- Manufacturing Equipment (7-year property): $150,000, placed in service on Feb 10.
- Office Furniture (7-year property): $50,000, placed in service on Nov 5.
- Goodwill: Acquired in a business purchase for $60,000 on April 1.
Zenith elects to take the maximum Section 179 deduction on the manufacturing equipment. Calculate Zenith's total depreciation and amortization for 2026.
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- This is the first check for personal property.
- Total personal property placed in service: $150,000 (Equip) + $50,000 (Furniture) = $200,000.
- Property placed in Q4 (Oct-Dec): $50,000 (Furniture).
- Percentage in Q4: $50,000 / $200,000 = 25%.
- Conclusion: Since 25% is not more than 40%, the half-year convention applies.
- Zenith elects to expense the manufacturing equipment.
- Cost of equipment: $150,000. This is below the annual limit and the income limit.
- Section 179 Deduction: $150,000.
- Remaining basis of equipment: $150,000 - $150,000 = $0.
- Bonus applies to the remaining basis of qualifying property.
- The manufacturing equipment has $0 basis left.
- The office furniture is qualifying property with a basis of $50,000.
- Bonus depreciation on furniture: $50,000 * 20% = $10,000.
- Bonus Depreciation Deduction: $10,000.
- Calculate MACRS on the basis remaining after Section 179 and Bonus.
- Manufacturing Equipment: Basis is $0. MACRS is $0.
- Office Furniture:
- Original basis: $50,000
- Less bonus depreciation: ($10,000)
- Depreciable basis: $40,000
- This is 7-year property. The first-year rate for 7-year property (200% declining balance, half-year convention) is 14.29%.
- MACRS depreciation: $40,000 * 14.29% = $5,716.
- MACRS Depreciation Deduction: $5,716.
- Goodwill is a §197 intangible amortized straight-line over 15 years (180 months).
- Placed in service April 1, so there are 9 months of amortization in 2026 (April-Dec).
- Monthly amortization: $60,000 / 180 months = $333.33.
- 2026 amortization: $333.33 * 9 months = $3,000.
- Amortization Deduction: $3,000.
- Section 179: $150,000
- Bonus Depreciation: $10,000
- MACRS Depreciation: $5,716
- Amortization: $3,000
- Total Deduction for 2026: $168,716.
This methodical process is the only way to guarantee a correct answer. You can test this hierarchy yourself with VoraPrep's adaptive question bank, which includes dozens of scenarios just like this one. Try our EA practice questions for free.
How Should I Prepare for Depreciation Questions on Exam Day?
Success on these questions comes from strategy, not just memorization.First, create a mental checklist. When you see a depreciation question, immediately ask:
- What is the asset type (personal, real, intangible)?
- What is its recovery period (5-year, 7-year, etc.)?
- When was it placed in service (to check the mid-quarter convention)?
- Does Section 179 apply? Is it elected? Are limits met?
- Does Bonus Depreciation apply (20% for 2026)?
- What basis is left for MACRS?
- Are there any special limits (e.g., luxury autos)?
Second, practice the hierarchy until it's automatic. Use a tool like VoraPrep, where our adaptive engine will notice if you struggle with multi-step problems and give you more practice until you master the sequence. Our Vory tutor is also available 24/7 to explain the "why" behind the correct order of operations.
Finally, understand how depreciation affects a business's overall tax liability. A larger depreciation deduction reduces taxable income, which is a core concept in SEE Part 2. This connects to other topics, like how business income is taxed, which is covered in our guide to tax computation and rates for individuals.