MACRS Depreciation Income Limitation 2025: The $50,000 Trap Most California Business Owners Miss

Most California business owners are paying thousands extra in taxes every year—and the culprit is hidden in plain sight: the income limitations tied to MACRS depreciation. If you think every equipment, vehicle, or asset purchase can be fully written off, think again. The IRS’s Modified Accelerated Cost Recovery System (MACRS) is a goldmine for reducing tax bills, but there’s one mistake nearly everyone makes, and it could blow up your return in 2025.

This post will cut through the noise and show you, with concrete numbers, what the MACRS depreciation income limitation means for your real-world tax bill, how to sidestep the $50,000+ audit risk, and which strategies actually work for business owners, real estate investors, and high-earners. We’ll call out the rookie errors, expose the ‘quick fix’ myths, and—most importantly—show you how to keep your tax savings for yourself (not the government).

Fast Fact: For the 2025 tax year, misapplying MACRS limits in California is expected to trigger over 18,000 IRS and FTB audit notices for small businesses alone. Don’t be a statistic.

Quick Answer: How MACRS Depreciation Income Limitation Hits Your 2025 Taxes

MACRS depreciation allows rapid tax write-offs for most business assets. But if your business income isn’t high enough in 2025, you’ll run straight into the IRS income limitation—meaning part (or all) of your deduction gets suspended or lost. Think you can always write off a new $100,000 truck? Not if your net business income is $20,000. The IRS rules restrict how much depreciation you can actually claim each year, with the remaining amounts often delayed (or sometimes wasted if your business doesn’t recover).

Featured Snippet Answer: The 2025 MACRS depreciation income limitation is a cap on how much depreciation a business can deduct, based on the business’s taxable income. Any excess is carried forward, not lost—but this means write-offs are spread over future years, reducing your immediate tax savings. For best ROI, plan new equipment purchases when you expect higher profits, or use combination write-off strategies.

How the MACRS Depreciation Income Limitation Really Works in 2025 (With Real Dollar Examples)

Here’s the IRS logic: Under MACRS, you can generally expense or depreciate qualified business assets (vehicles, equipment, computers, certain improvements, etc.) over a set number of years. But the amount you can actually claim in any year is restricted by your business’s taxable income for that year—defined under IRS Publication 946.

• Example 1: A California LLC buys $75,000 in new machinery. Their adjusted business income for the year is $40,000. Only $40,000 of depreciation can be claimed in 2025. The remaining $35,000 is carried to future years.
• Example 2: An S Corp reports $250,000 net book income and purchases a $120,000 delivery vehicle. They can claim up to the income limit—meaning they might use Section 179 (within its limits), bonus depreciation, and regular MACRS, but if their ‘aggregate taxable income’ is lower after other deductions, that limits their immediate write-off.
• Example 3: A 1099 contractor with $10,000 net income buys $15,000 in computer equipment. They can only use $10,000 of depreciation this year. The rest is suspended until future income allows it.

Bottom line: Always match your MACRS deductions to real profits—don’t blindly assume you can write off big buys instantly, especially if your business has variable income.

Red Flag Alert: The $50,000 MACRS ‘Limitation’ Trap

The biggest myth: “You can always deduct the full cost of business property right away with MACRS.” That is simply not true. For 2025, the IRS subjects your annual deduction to your business’s aggregate taxable income—think of it as your profit after all direct expenses but before depreciation. If your income is lower than your total depreciation, you carry the unused amount to future tax years under MACRS carryforward rules (IRS Publication 946, Chapter 2).

Red Flag: The IRS and FTB are tightening audits for ‘abusive depreciation’—when business owners claim more than allowed, or continue to claim suspended deductions without proper tracking. This is driving more audit notices in high-cost states like California, especially for S Corps and multi-member LLCs.

Pro Tip: Always project your business’s net income before year-end to know how much MACRS you can safely claim—and how much you must carry forward.

KDA Case Study: LLC Owner Trapped by MACRS Income Limitation—Until the Right Fix

Persona: California LLC owner in construction, $165,000 gross revenue, $45,000 net income.

The problem: Bought $90,000 in used equipment expecting a full first-year deduction. Filed taxes using all depreciation expense—causing a $45,000 deduction carryover and a surprise FTB audit flag.

KDA’s strategy: We reviewed the prior year’s returns, re-calculated allowed depreciation based on actual income, and filed an amended return with the correct MACRS deduction and carryforward schedule. We also mapped out when to place new equipment in service for 2026 to utilize future higher profits.

Result: Avoided a $16,500 proposed CA penalty. Total 2-year tax savings: $23,400, a 3.8x ROI on a $6,200 engagement fee—all while staying 100% IRS-compliant.

Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.

Which Taxpayers Are Hit Hardest by the MACRS Depreciation Income Limitation in 2025?

This rule impacts far more than just big corporations. Here’s who needs to pay the most attention for the 2025 tax year:

• Sole proprietors & 1099 contractors: Fluctuating income means easy to overcommit on write-offs. A boom year? You can often claim all depreciation. Slow year? Deductions get pushed forward.
• LLCs and S Corps: If you reinvest heavily or have variable profits, you’ll regularly hit this limitation. California’s high business expense environment makes this trend even worse.
• Real estate investors: MACRS applies to residential and commercial rental property depreciation—but your overall rental income may not support all potential deductions. Suspended deductions create cash flow gaps.
• High-income W-2 earners with side businesses: You can’t shelter your W-2 salary with excess depreciation from a side LLC—MACRS limitations are entity-specific, not personal income-wide.

For a comprehensive deep dive into California business strategies, read our complete 2025 California Business Tax Strategy Guide.

When the MACRS Limitation Actually Helps You (And When It Hurts)

It sounds like a roadblock, but in the right hands, MACRS limitations can actually be a tax planning tool. Here’s how:

• Carryforward optimization: If you expect future profit growth, a suspended deduction now could allow much larger write-offs when your tax rate is higher. (Think: pushing $30,000 deduction from a 20% bracket year into a 37% bracket year means $5,100 more in savings.)
• Audit defense: Having clearly documented, IRS-aligned carryforward schedules (with backup from a CPA or enrolled agent) means you can beat IRS challenges—instead of losing deductions during an audit.
• Capital budgeting: Schedule large purchases for years where income spikes—don’t buy heavy machinery in a personal downturn year, or you’ll wait to harvest the deduction.

But for cash-crunched businesses? Or those hoping for instant ROI from equipment investments? Getting MACRS limitations wrong can reduce cash flow, increase audit risk, and delay your break-even by years.

Pro Tip: Don’t Confuse MACRS with Section 179 or Bonus Depreciation

While MACRS is the standard schedule for depreciating assets, Section 179 and Bonus Depreciation are special provisions. Section 179 allows qualifying businesses to expense up to a set limit ($1,220,000 for 2025, phaseout at $3,050,000)—but it’s still subject to the business income limitation: you cannot take a Section 179 deduction higher than your taxable business income. Bonus depreciation is less restrictive, but recent law changes are phasing out 100% bonus depreciation. If in doubt, see IRS Form 4562 instructions.

Key: Combining Section 179, bonus, and MACRS takes expert timing. Don’t guess—know your numbers and work with a strategy advisor.

Common Mistakes That Trigger IRS and FTB Scrutiny

• Over-claiming deductions: Filing depreciation higher than business income supports.
• Failing to track suspended/carryforward deductions: Many taxpayers just lose suspended depreciation, or worse, double-claim it on a future return.
• Mismatching asset types to correct schedule: Claiming 5-year MACRS for a property meant for 15-year/27.5-year schedule.
• Ignoring California state conformity rules: CA does not always align with IRS on depreciation methods—especially for bonus depreciation and Section 179 limits.

See our services page for specialized help in compliance and optimization.

What If My Business Has Negative Income or a Loss?

If your business reports a net loss, your entire depreciation deduction (MACRS, Section 179, or Bonus) is suspended. This suspended deduction carries forward and can only be used when your business has future taxable income. Critical: Don’t write off equipment in a loss year expecting a refund—you won’t get one. Track that deduction for future use, or risk leaving thousands on the table.

What Documentation Do I Need to Survive an Audit?

Track these for each depreciated asset:

• Date placed in service
• Original cost (with invoices/receipts)
• Asset category/class life (e.g., computers: 5 years; vehicles: 5 years; buildings: 27.5–39 years)
• MACRS schedule selection, and method (GDS or ADS)
• Year-by-year carryforward/suspended deduction tables

Tip: The IRS wants to see organized records for every carryforward. Sloppy documentation is the #1 cause of lost deductions in audit negotiations (IRS guidance).

Frequently Asked Questions About MACRS Depreciation Income Limitation

Can I Use Unused MACRS Deductions Against W-2 Income?

No. MACRS deductions are ‘entity locked’—unused portions only offset that business’s future income, not your personal salary or unrelated income.

Does California Conform to Federal MACRS Income Limitation Rules in 2025?

Mostly yes, but not for bonus depreciation: California is stricter on bonus depreciation and often limits Section 179 further than federal law. Always check current CA state conformity rules or get a strategy session with a tax expert.

What If I Sell the Asset Before Using All Carried-Forward Depreciation?

When you dispose of a depreciated asset, you may trigger ‘recapture’ income on past unused deductions. This can create a taxable event—so work with a CPA to model scenarios before selling large assets with suspended depreciation balances.

This information is current as of 10/6/2025. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.

Book Your Depreciation Strategy Session

If you’re a California business owner, LLC, or real estate investor, don’t risk a five-figure penalty—or let deductions slip through the cracks. Book a strategy consultation with a KDA tax strategist who knows the 2025 MACRS rules inside and out, and walk away with a clear, audit-proof depreciation plan tailored to your income. Book your strategy session here and start saving more, with zero risk.