Calculating Depreciation With Rev Proc 87 57

Revenue Procedure 87-57 is an IRS document that provides guidance for calculating depreciation for tangible property. Its primary purpose is to offer optional tables with pre-calculated depreciation rates under the Modified Accelerated Cost Recovery System (MACRS). This system is the required method for most tangible property placed in service after 1986. The tables in Rev. Proc. 87-57, also found in IRS Publication 946, How to Depreciate Property, simplify determining the annual depreciation deduction by saving taxpayers from performing more complex formula-based calculations.

Core Depreciation Concepts

To use the MACRS tables, one must understand its components. The system is divided into two primary subsystems: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS is the most common system and allows for faster depreciation over a shorter period, while ADS is required for certain types of property and uses a straight-line method over a longer recovery period.

An element of MACRS is the “recovery period,” which is the number of years over which an asset’s cost is written off. Different types of assets are assigned different recovery periods based on their class life, ranging from 3-year property like certain tools to 39-year property like nonresidential real estate. These periods are predetermined by the IRS.

MACRS also employs timing rules known as “conventions” to determine the depreciation for the year an asset is placed in service and the year it is disposed of. The three conventions are the half-year, mid-quarter, and mid-month. The half-year convention is the most common and treats property acquired during the year as being placed in service in the middle of that year. The mid-quarter convention applies if more than 40% of personal property is placed in service during the final three months of the tax year. The mid-month convention is used for residential rental and nonresidential real property.

Required Information for Calculation

Before you can select the correct table and calculate depreciation, you must gather several pieces of information about the asset. The first is the asset’s “basis,” which is the starting point for the calculation. For purchased assets, the basis is its cost, including any expenses necessary to get it operational, such as freight and installation fees.

The “placed-in-service date” is another important data point. This is the date the asset is ready and available for its specific use in a business, which is not necessarily its purchase date. This date determines the tax year for which you can begin to claim depreciation. It is also a deciding factor in whether the half-year or mid-quarter convention must be used for the calculation.

You must also identify the asset’s “property class.” The IRS categorizes all business assets into distinct classes, which in turn determine the recovery period and the depreciation method to be used. To find an asset’s property class, you can refer to IRS Publication 946, How To Depreciate Property. Appendix B of this publication contains detailed tables that list various types of assets and their corresponding recovery periods for both GDS and ADS.

Applying the Depreciation Tables

Once you have determined the asset’s basis, placed-in-service date, property class, and the applicable depreciation system and convention, you can proceed to the tables in Publication 946. The first step is to select the correct table based on the depreciation system, recovery period, and convention. For example, if you have a 5-year asset under GDS using the half-year convention, you would find the specific table designated for that combination.

With the correct table selected, you then locate the appropriate depreciation rate for the current year. The tables are structured with recovery years listed in the first column and the corresponding depreciation rates as percentages in the next. For the first year the asset is in service, you would use the rate from the “Year 1” row. In each subsequent year of the recovery period, you would move down to the next row to find that year’s rate.

The final step is to perform the calculation. The formula is to multiply the asset’s unadjusted basis by the depreciation rate found in the table. For instance, if a business places a $10,000 piece of 7-year property in service and the half-year convention applies, the rate for the first year according to the GDS table is 14.29%. The depreciation deduction for the first year would be $1,429 ($10,000 x 0.1429).