MACRS

MACRS Depreciation, or the Modified Accelerated Cost Recovery System, is the tax depreciation system used for business assets placed in service after 1986.

If you are depreciating property you placed in service before 1987, use the Accelerated Cost Recovery System (ACRS) or the same method you used in the past.

MACRS categorizes assets by class, and then applies depreciation rates based on those classes. For example, vehicles and computer equipment are classified as five-year property, office furniture is classified as seven-year property, residential rental property is classified as 27.5 year property, and nonresidential real property is classified as 39 year property.

MACRS Property Depreciation Schedule

Depreciation Period	Type of Property
3-year property	Computer software Tractor units for over-the road use Any race horse over 2 years old when placed in service Any other horse (other than a race horse) over 12 years old when placed in service
5-year property	Automobiles, taxis, buses, and trucks Computers and peripheral equipment Office machinery (such as typewriters, calculators, and copiers) Any property used in research and experimentation Breeding cattle and dairy cattle Appliances, carpets, furniture, etc., used in a residential rental real estate activity
7-year property	Office furniture and fixtures (such as desks, files, and safes) Agricultural machinery and equipment Any property that does not have a class life and has not been designated by law as being in any other class
10-year property	Vessels, barges, tugs, and similar water transportation equipment Any single purpose agricultural or horticultural structure Any tree or vine bearing fruits or nuts
15-year property	Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges) Any retail motor fuels outlet, such as a convenience store Any municipal wastewater treatment plant Any qualified leasehold improvement property placed in service before January 1, 2010 Any qualified restaurant property (defined later) placed in service before January 1, 2010 Any qualified retail improvement property placed in service before January 1, 2010
20-year property	Farm buildings (other than single purpose agricultural or horticultural structures)
27.5-year property	Residential rental property (e.g. an apartment building)
39-year property	Nonresidential real property such as an office building, store, or warehouse

In our accounting example, since Sunny put a company vehicle in service in 2010 at an original cost of $12,800, he looked up the depreciation rate in the MACRS tax table for 5-year property. He will now decide which MACRS tax table to use.

MACRS Tax Tables

MACRS provides three depreciation methods under the General Depreciation System (GDS) and one depreciation method under the Alternative Depreciation System (ADS). You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. For example, if you have listed property that you use less than 50% in business, you must use ADS.

Which MACRS Depreciation Method Should You Use?

Small business owners may want to consider taking a smaller tax deduction in the early years if you expect business profits to increase in later years when tax rates are higher. This tax strategy preserves larger depreciation deductions for when tax rates are higher.

Business owners can also apply lower depreciation rates in earlier periods to show a profit in case the business is at risk of being ruled a hobby. Otherwise, it is generally better to choose the higher depreciation rates in the earlier years for maximum tax savings.

MACRS Tax Table 1

200% Declining Balance for Nonfarm 3, 5, 7, and 10-year property:

Half-year Convention

Year	3 Years	5 Years	7 Years	10 Years
1	33.33%	20.00%	14.29%	10.00%
2	44.45%	32.00%	24.49%	18.00%
3	14.81%	19.20%	17.49%	14.40%
4	7.41%	11.52%	12.49%	11.52%
5		11.52%	8.93%	9.22%
6		5.76%	8.92%	7.37%
7			8.93%	6.55%
8			4.46%	6.55%
9				6.56%
10				6.55%
11				3.28%

The 200% Declining Balance Tax Table under MACRS results in the following vehicle depreciation schedule for 5 year property:

Example Depreciation Schedule from 200% Declining Balance Tax Table

Year	Unadjusted Basis	MACRS Rate	Depreciation Deduction	Adjusted Basis
1	$12,800	20.00%	$2,560	$10,240
2	12,800	32.00%	4,096	6,144
3	12,800	19.20%	2,458	3,686
4	12,800	11.52%	1,475	2,211
5	12,800	11.52%	1,475	737
6	12,800	5.76%	737	0
TOTAL DEPRECIATION = ………………………… $12,800

The IRS Tax Tables are designed to simply multiply the unadjusted basis (original cost) by the MACRS depreciation rate specified to get the depreciation amount for the year. The adjusted basis of the property is the unadjusted basis less the total amount of depreciation taken from the asset to date. Eventually the adjusted basis will equal zero at the end of the asset depreciation schedule. If you sell the asset before fully depreciating it, you will take into account the adjusted basis to compute the total gain or loss on the asset.

The IRS computes the adjusted basis of the property whether or not you claimed depreciation on your tax return, so it is always best to claim it!

From the above depreciation schedule, Sunny would use form 4562 to deduct $2,560 in vehicle depreciation for the first year the asset was placed in service.

MACRS Tax Table 2

150% Declining Balance for Nonfarm 3, 5, 7, and 10-year property:

Half-year Convention

Year	3 Years	5 Years	7 Years	10 Years
1	25.00%	15.00%	10.71%	7.50%
2	37.50%	25.50%	19.13%	13.88%
3	25.00%	17.85%	15.03%	11.79%
4	12.50%	16.66%	12.25%	10.02%
5		16.66%	12.25%	8.74%
6		8.33%	12.25%	8.74%
7			12.25%	8.74%
8			6.13%	8.74%
9				8.74%
10				8.74%
11				4.37%

The 150% Declining Balance Tax Table under MACRS results in the following vehicle depreciation schedule for 5 year property:

Example Depreciation Schedule from 150% Declining Balance Tax Table

Year	Unadjusted Basis	MACRS Rate	Depreciation Deduction	Adjusted Basis
1	$12,800	15.00%	$1,920	$10,880
2	12,800	25.50%	3,264	7,616
3	12,800	17.85%	2,284	5,332
4	12,800	16.66%	2,133	3,199
5	12,800	16.66%	2,133	1,066
6	12,800	8.33%	1,066	0
TOTAL DEPRECIATION = …………………………. $12,800

From the above depreciation schedule, Sunny would use form 4562 to deduct $1,920 in vehicle depreciation for the first year the asset was placed in service.

Half-Year Convention

The MACRS depreciation schedule simplifies the depreciation calculations for assets placed in service at different times during the year by using a “half-year” convention. This means the depreciation schedule treats all property as placed in service or disposed of as placed in service or disposed of at the midpoint of the year. This is why there is an extra year for each depreciation schedule (e.g. there are six years of depreciation instead of five for five year property).

This prevents a taxpayer from having to keep track of each date the asset was placed in service.

Mid-Quarter Convention

However, if more than 40% of all property is placed in service during the last three months of the year, you cannot use the half-year convention, and must use the mid-quarter convention tax tables instead.

It is generally a good idea to avoid the mid-quarter convention since it offers less tax deductions during the first year. You can do this by buying more than 60% of your total depreciable assets before September 30, or applying section 179 deductions to assets placed in service in the last quarter, which then do not count towards the 40% limitation.

Most tax preparation software will calculate which convention applies to your tax situation when you enter the date you purchased the property. Alternatively, you can determine which convention applies based on when you purchased the property, and use the tax tables in IRS Publication 946, which factor in the convention and depreciation rates for you.

MACRS and Listed Property

The IRS has special rules for listed property because these items can easily be used for both personal and business use. If you use these items more than 50% of the time for business use, then you can depreciate listed property like any other property, including Section 179. However, if you use the property less than 50% of the time, this property is not eligible for Section 179 deductions or accelerated depreciation under the General Depreciation System (GDS) used in the examples above. You may only use the straight line method under the Alternative Depreciation System (ADS) recovery period.

What is Listed Property?

• Passenger automobiles weighing 6,000 pounds or less.
• Any other property used for transportation, unless it is an excepted vehicle.
• Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video-recording equipment).
• Computers and related peripheral equipment, unless used only at a regular business establishment and owned or leased by the person operating the establishment. A regular business establishment includes a portion of a dwelling unit that is used both regularly and exclusively for business.

The Small Business Jobs Act of 2010 has removed cell phones and comparable communication equipment, e.g. BlackBerrys, personal digital assitants, and smart phones from the Internal Revenue Code’s “listed property” classification. This exclusion became effective beginning in tax year 2010.

The ADS depreciation schedules generally have longer deprecation periods for property. However, you can still use a depreciation period of five years for cars, trucks, and computer equipment. ADS requires the straight line depreciation method, which provides for equal yearly deductions over the depreciation period.

MACRS Depreciation Schedules are for Income Tax Reporting Only

You cannot use MACRS depreciation tables to report the same depreciation expenses on your audited financial statements as you do on your tax returns under generally accepted accounting principles. This is mainly because MACRS depreciation methods ignore the useful life of the asset and its salvage value, and therefore do not properly allocate the depreciation expense over the useful life of the asset for financial reporting purposes.

MACRS depreciation schedules are only used for income tax reporting, not financial reporting. MACRS aims to maximize deductions using accelerated depreciation schedules to encourage capital investments, not to accurately reflect the use of the asset over its useful life on the financial statements.

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