How to Use and Calculate MACRS Depreciation

The Modified Accelerated Cost Recovery System (MACRS) is the primary depreciation system for tax purposes in the United States. It allows businesses to deduct the cost of eligible tangible property over a specified period, reflecting asset wear and tear or obsolescence. These deductions help businesses recover capital expenditures, reducing their taxable income. Understanding and applying MACRS is important for managing tax liabilities effectively.

Understanding MACRS Basics

MACRS applies to tangible property used in a trade or business or for income production, which is subject to wear, tear, or obsolescence. Eligible property includes machinery, equipment, vehicles, office furniture, and buildings. These assets must have a useful life extending beyond one year to qualify.

Certain property types are not eligible for MACRS depreciation. This includes land, inventory, intangible property like patents or copyrights, and property placed in service and disposed of in the same tax year. Property used predominantly outside the U.S. or certain tax-exempt use property may also not qualify.

MACRS encompasses two main depreciation systems: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS is the most frequently used, offering accelerated depreciation. ADS generally uses longer recovery periods and requires the straight-line method, resulting in smaller annual deductions. Businesses may elect ADS, and it is sometimes required for specific property types, such as certain listed property used 50% or less for business or tax-exempt bond-financed property.

Key Components for MACRS Calculation

Calculating MACRS depreciation requires understanding several key components, beginning with the asset’s “Recovery Period.” This period determines the number of years over which an asset’s cost can be depreciated. The IRS assigns specific recovery periods based on asset class, such as 3-year property (e.g., specialized manufacturing tools), 5-year property (e.g., automobiles, computers, office machinery), 7-year property (e.g., office furniture, fixtures), 15-year property (e.g., land improvements), 27.5-year property (residential rental property), and 39-year property (nonresidential real property).

Depreciation Methods define how the expense is allocated over the recovery period. MACRS primarily uses the Declining Balance Method and the Straight-Line Method. The 200% Declining Balance method, also known as Double Declining Balance, applies to 3-year, 5-year, 7-year, and 10-year property, allowing larger early deductions. The 150% Declining Balance method is used for 15-year and 20-year property, and for farm property. For real property, such as residential rental and nonresidential real estate, the Straight-Line Method is generally required, distributing the expense evenly.

Taxpayers can also elect to use the 150% Declining Balance or Straight-Line method for property that would otherwise use the 200% Declining Balance method.

Conventions dictate when depreciation begins and ends in the year an asset is placed in service or disposed of. The Half-Year Convention is most common for personal property, treating assets as placed in service or disposed of at the midpoint of the tax year, allowing a half-year of depreciation. The Mid-Quarter Convention applies if over 40% of MACRS property (excluding real property) is placed in service during the last three months of the tax year; property is treated as placed in service at the midpoint of that quarter. The Mid-Month Convention is for residential rental and nonresidential real property, treating property as placed in service or disposed of at the midpoint of the month.

Applying Special Depreciation Rules

Businesses can utilize special depreciation rules to accelerate deductions. Section 179 Expensing allows businesses to deduct the full purchase price of qualifying property in the year it is placed in service, rather than depreciating it over several years. For 2025, the maximum Section 179 deduction is \$1,250,000. This deduction phases out when qualifying property placed in service exceeds \$3,130,000 for 2025, completely phasing out at \$4,380,000 in purchases.

Qualified Section 179 property includes tangible personal property like machinery, equipment, off-the-shelf software, and certain real property improvements such as roofs, HVAC, fire protection, and security systems. A business’s Section 179 deduction cannot exceed its taxable income.

Bonus Depreciation provides another avenue for accelerated deductions, allowing businesses to deduct a large percentage of qualifying property’s cost in the year it is placed in service. For qualifying property acquired after January 19, 2025, and placed in service in the first taxable year ending after that date, 100% bonus depreciation may be available. Unlike Section 179, bonus depreciation does not have a taxable income limitation and can apply to both new and used property, provided it is “new to you” for the purchasing business.

These special rules are often used together to maximize first-year deductions. IRS rules typically require applying Section 179 first, followed by bonus depreciation, if applicable. If an asset’s cost exceeds the Section 179 limit, the remaining basis can then be eligible for bonus depreciation. These provisions incentivize businesses to invest in capital assets, providing immediate tax benefits.

Calculating and Reporting MACRS Depreciation

Calculating MACRS depreciation integrates the asset’s cost, recovery period, depreciation method, and applicable convention. For example, consider a business purchasing \$10,000 of 5-year office equipment on March 15th, electing no special depreciation. As personal property placed in service early in the year, the Half-Year Convention generally applies. The 200% Declining Balance method is typically used for 5-year property.

To calculate the first year’s depreciation, apply the 200% declining balance rate (40% for a 5-year asset) to the asset’s basis, then halve it due to the convention. For subsequent years, the 200% Declining Balance rate applies to the remaining adjusted basis until the straight-line method yields a larger deduction, at which point a switch occurs.

For real property, such as a nonresidential building purchased for \$1,000,000 on July 20th, the 39-year recovery period and Straight-Line method with the Mid-Month Convention apply. The annual straight-line rate is approximately 2.56%. For the first year, depreciation is calculated by applying this rate to the \$1,000,000 basis, adjusted for the mid-month convention (5.5 months total for July through December). Each subsequent full year claims the full annual straight-line depreciation amount.

When incorporating Section 179 and Bonus Depreciation, these are typically taken before regular MACRS depreciation. If a business purchased the \$10,000 office equipment and elected Section 179, the full \$10,000 would be deducted in the first year, assuming limits are met. If Section 179 was not fully utilized or elected, and 100% bonus depreciation was applicable (for qualifying property acquired after January 19, 2025), the business could deduct 100% of the cost in the first year. Any remaining basis after applying Section 179 and bonus depreciation would then be subject to MACRS calculations.

Reporting MACRS depreciation is done on IRS Form 4562, “Depreciation and Amortization.” This form reports current year depreciation, including Section 179 expense and bonus depreciation. Part I of Form 4562 is for the Section 179 election; other sections report regular MACRS depreciation. Businesses must file Form 4562 with their annual tax return if claiming depreciation for property placed in service during the tax year, electing Section 179, or claiming depreciation on any vehicle or listed property.