What Is MACRS (Modified Accelerated Cost Recovery System)?
MACRS is the U.S. federal tax depreciation system for most tangible depreciable property placed in service after 1986. It lets businesses recover an asset’s cost over a prescribed recovery period by taking annual depreciation deductions. MACRS accelerates expense recognition (larger deductions earlier) compared with straight‑line for many asset classes, reducing taxable income in the early years of an asset’s life.
Why MACRS matters
– It is the default depreciation method for most tax filings (required for property placed in service after 1986).
– Accelerated deductions improve near‑term cash flow by lowering current tax liabilities.
– MACRS is a tax rule only — financial reporting (GAAP) often uses different depreciation methods.
Primary sources and further reading
– IRS Publication 946, How to Depreciate Property: https://www.irs.gov/publications/p946
– Investopedia overview of MACRS: https://www.investopedia.com/terms/m/macrs.asp
– Cornell Law School — Legal Information Institute (definition): https://www.law.cornell.edu
Key concepts and terms
– Basis: usually the asset’s cost (plus certain adjustments). Depreciation is computed on basis multiplied by the percentage of business/investment use. Land is not depreciable.
– Recovery period (useful life): IRS‑assigned number of years for each property class (3, 5, 7, 10, 15, 20, 27.5, 39, etc.). See Pub 946 for full lists.
– GDS (General Depreciation System): the common MACRS system—uses declining‑balance switching to straight‑line in many classes.
– ADS (Alternative Depreciation System): uses longer recovery periods and straight‑line method; required in some situations and available by election in others.
– Conventions: timing rules that determine fractions of a year to depreciate in the first and last year (half‑year, mid‑quarter, mid‑month).
– Listed property and business‑use rules: if “listed property” (cars, certain electronics, etc.) is used ≤50% for business, ADS must be used and depreciation limits apply.
– Form 4562: used to report depreciation and elect Section 179/ADS, and to claim certain deductions.
Types of MACRS and methods
– Under GDS:
– 3‑, 5‑, 7‑, and 10‑year personal property normally use 200% declining balance switching to straight‑line.
– 15‑ and 20‑year property generally use 150% declining balance switching to straight‑line.
– Residential rental property (27.5 years) and nonresidential real property (39 years) use straight‑line with mid‑month convention.
– Under ADS:
– Straight‑line over longer IRS recovery periods (e.g., 30 years for residential rental under ADS; 40 years for commercial real property).
– The taxpayer can elect to use ADS for an entire class of property; that election is generally irrevocable for that tax year/class without IRS consent (see Pub 946).
Conventions (timing rules)
– Half‑year convention: default for most personal property — assumes property placed in service at midyear (one half year of depreciation in first year).
– Mid‑quarter convention: applies instead of half‑year when more than 40% of the total basis of property (except real property) is placed in service in the last quarter of the tax year. This prevents bunching year‑end purchases from getting half‑year treatment.
– Mid‑month convention: used for real property (residential and nonresidential); treats property as placed in service in the middle of the month it was placed in service.
Basic step‑by‑step: how to apply MACRS (practical checklist)
1. Identify the asset and confirm it’s depreciable (tangible property used in a trade/business or to produce income; land is excluded).
2. Determine the date the property was placed in service (this determines the tax year and convention).
3. Determine the property class and recovery period using IRS Pub 946 (e.g., 5‑year for computers, 27.5 for residential rental).
4. Decide whether GDS or ADS applies:
– Use GDS unless ADS is required (e.g., property used predominantly outside the U.S., tax‑exempt use property, certain farming property) or you elect ADS for the class.
– If listed property is used 50% or less for business, ADS is required for that property.
5. Determine the applicable convention (half‑year, mid‑quarter or mid‑month). If >40% of personal property basis was placed in service in Q4, use mid‑quarter.
6. Compute the depreciable basis: cost basis × business‑use percentage (subtract Section 179 or bonus depreciation if you elect them first on Form 4562).
7. Apply the MACRS percentage for the tax year:
– Use MACRS tables (IRS Pub 946 includes tables for GDS/ADS under specific conventions) or compute using the declining‑balance formula and switching to straight‑line when beneficial.
– Example (5‑year property under GDS half‑year convention): standard MACRS table percentages are Year1 20.00%, Year2 32.00%, Year3 19.20%, Year4 11.52%, Year5 11.52%, Year6 5.76%.
– Multiply the depreciable basis by the year’s percentage to get the depreciation deduction.
8. Record and report:
– Report depreciation on Form 4562 with details required by the form.
– Keep supporting records (purchase invoice, placed‑in‑service date, business‑use log if any, calculations).
Illustrative example
– You buy a business computer for $5,000 placed in service on May 1 and it’s 100% business use. Computers are 5‑year MACRS property (GDS). Under half‑year convention the Year‑1 MACRS percentage is 20%. Year‑1 depreciation = $5,000 × 20% = $1,000. (Subsequent years follow the table percentages.)
Interplay with Section 179 and bonus depreciation
– Section 179: allows immediate expensing of qualifying property up to elected limits (subject to business income and phaseouts). Election is made on Form 4562.
– Bonus (additional) first‑year depreciation (Section 168(k)): allows a taxpayer to deduct a specified percentage of the cost in the first year (the percentage has varied by year — e.g., 100% in certain years; consult current law).
– Important: Section 179 and bonus depreciation, if elected, reduce the basis before MACRS percentages are applied. They can significantly change first‑year deductions and the remaining depreciable basis for later years. Check current year limits and rules.
Common traps and practical tips
– Don’t forget the mid‑quarter rule — if triggered, it can materially change first‑year depreciation percentages.
– If business use of listed property declines to 50% or less, you may have to recapture excess depreciation (special rules apply).
– MACRS is for tax returns only; keep separate depreciation schedules for financial accounting if using GAAP.
– Elections (ADS for a class, Section 179) can be irrevocable or have limits—make elections knowingly and document them.
– Keep meticulous records of placed‑in‑service dates, cost allocations (if multiple assets purchased), and business‑use substantiation for listed property.
When ADS must be used (examples)
– Property used predominantly outside the U.S.
– Tax‑exempt use property.
– Certain farming property.
– Listed property used 50% or less in a qualified business use.
– If required, ADS uses longer recovery periods and straight‑line depreciation.
What MACRS does not cover
– Land (not depreciable).
– Most intangible assets (amortized under different rules; e.g., patents, goodwill).
– Certain property received in nontaxable corporate reorganizations may be excluded.
Reporting and forms
– Form 4562, Depreciation and Amortization, is used to claim depreciation deductions (including Section 179) and to elect ADS.
– Use IRS Pub 946 for tables, examples, and detailed rules. The IRS website has the latest forms and publications.
References and authoritative guidance
– IRS Publication 946, How to Depreciate Property — step‑by‑step guidance, MACRS tables, conventions and examples: https://www.irs.gov/publications/p946
– IRS Form 4562 instructions: https://www.irs.gov/forms-pubs/about-form-4562
– Investopedia — MACRS overview and examples: https://www.investopedia.com/terms/m/macrs.asp
– Cornell Law School, Legal Information Institute — definition and statutory references: https://www.law.cornell.edu
The bottom line
MACRS is the tax depreciation framework most U.S. businesses use to recover asset cost. Applying it correctly requires determining the asset class and recovery period, choosing between GDS and ADS when appropriate, observing the correct convention, and applying MACRS tables or formulas (after considering Section 179 and bonus depreciation). Use IRS Publication 946 and Form 4562 when preparing returns, and consult a tax professional for complex situations or to optimize elections.
If you’d like, I can:
– Walk through a specific purchase you made and compute MACRS depreciation for the next several years, or
– Provide the MACRS percentage table for common recovery periods (3, 5, 7, 27.5, 39 years) and conventions for quick reference.