How to Use the IRS MACRS Depreciation Tables

The Modified Accelerated Cost Recovery System (MACRS) is the required depreciation method for most tangible property placed in service after 1986 for U.S. tax purposes. Unlike financial accounting depreciation, MACRS is designed to accelerate deductions, providing larger write-offs in the earlier years of an asset’s life. Calculating these deductions requires using specific percentage tables published by the Internal Revenue Service (IRS), which are structured based on the property type, depreciation system, and a convention that determines the timing of the first-year deduction.

Correctly navigating this system depends on gathering specific information about the asset before using the tables.

Information Needed for MACRS Calculations

Before calculating depreciation, several pieces of information about the asset must be determined. These data points dictate which system, method, and table will be used for the calculation.

Asset’s Depreciable Basis

An asset’s depreciable basis is its cost, which includes the purchase price, sales tax, freight charges, and any installation or testing fees. If property is used for both business and personal purposes, the basis for depreciation is limited to the percentage of business use. For example, if a vehicle is purchased for $30,000 and used 60% for business, the depreciable basis is $18,000. The cost of land is never depreciable and must be separated from the cost of a building when real estate is purchased.

Property Class and Recovery Period

Under MACRS, assets are assigned to property classes that determine the recovery period, which is the number of years for depreciation. These classes are defined in IRS Publication 946. Common examples of 5-year property include computers, office machinery, and vehicles, while office furniture and fixtures are classified as 7-year property. Real property is divided into two classes: residential rental property (27.5-year recovery period) and nonresidential real property (39-year recovery period).

Applicable Depreciation System

MACRS has two systems: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS is the most used system and allows for faster depreciation through declining balance methods. ADS is required for certain property, such as property used predominantly outside the U.S., tax-exempt use property, and property financed with tax-exempt bonds. ADS uses the straight-line method and has longer recovery periods, though a taxpayer can also make an irrevocable election to use ADS for a class of property.

Applicable Depreciation Convention

A convention determines how much depreciation is deductible in the first and last years of an asset’s life. The half-year convention is the most common, treating property as placed in service at the midpoint of the year. The mid-month convention is used only for residential rental and nonresidential real property, treating property as placed in service in the middle of the month it was acquired.

The mid-quarter convention must be used for all personal property if more than 40% of the total basis of such property is placed in service during the final three months of the tax year. This “40% test” is performed after any Section 179 deduction is taken but before calculating bonus depreciation.

Using the MACRS Depreciation Tables

Once the asset’s basis, property class, system, and convention are determined, the annual depreciation deduction can be calculated using the appropriate IRS percentage table. These tables provide the applicable depreciation rate for each year of the recovery period. The tables have the depreciation method and convention built into the percentages, simplifying the calculation process.

Locating the Correct Table

The tables are organized by depreciation system (GDS or ADS) and convention. For example, Table A-1 is for the GDS system using the half-year convention and covers various property classes. If the mid-quarter convention applies, there are separate tables for property placed in service in each quarter (Tables A-2 through A-5). For real property, Table A-6 is used for residential rental property, while nonresidential real property uses Table A-7a.

Step-by-Step Calculation Example

The formula is the asset’s unadjusted depreciable basis multiplied by the percentage rate from the table for the given recovery year. This calculation is repeated each year using the original basis. Consider a business that purchases new office furniture for $20,000, which is 7-year property, and the half-year convention applies.

• Year 1: $20,000 (Basis) x 14.29% = $2,858
• Year 2: $20,000 x 24.49% = $4,898
• Year 3: $20,000 x 17.49% = $3,498
• Year 8: $20,000 x 4.46% = $892

The recovery period for 7-year property is spread over eight calendar years because the half-year convention provides for a half-year of depreciation in year one and the final half-year in year eight.

Special Depreciation Allowances

Before applying the standard MACRS tables, businesses may use special allowances for an immediate deduction on some or all of an asset’s cost. These provisions, Section 179 and bonus depreciation, are taken in the year the property is placed in service. They reduce the asset’s depreciable basis before the regular MACRS calculation is performed.

Section 179 Deduction

The Section 179 deduction allows a taxpayer to expense the cost of qualifying property, deducting the entire cost up to a limit in the first year. Qualifying property is tangible personal property, like machinery and equipment, and off-the-shelf computer software purchased for business use. For tax year 2024, the maximum deduction is $1,220,000. This limit is reduced if the total cost of qualifying property placed in service during the year exceeds an investment threshold of $3,050,000, and the deduction is also limited to the business’s taxable income.

Bonus Depreciation

Bonus depreciation is an additional first-year deduction taken after any Section 179 deduction but before regular MACRS depreciation. It is automatic for qualified property unless the taxpayer elects out of it. Qualified property includes new or used MACRS property with a recovery period of 20 years or less. The bonus depreciation rate is being phased out; for property placed in service in 2024, the rate is 60%, decreasing to 40% in 2025, 20% in 2026, and eliminated in 2027. For example, a $50,000 asset placed in service in 2024 could receive a $30,000 bonus deduction, leaving a $20,000 basis for regular MACRS.

Reporting Depreciation on Tax Forms

After calculating the total depreciation deduction for the year, the figures must be reported to the IRS. The primary form for this is Form 4562, Depreciation and Amortization, which is filed with the business’s annual income tax return, such as a Schedule C for a sole proprietor or Form 1120 for a corporation.

IRS Form 4562

Form 4562 is used to report different types of depreciation and amortization. A filer must complete this form if claiming depreciation for property placed in service during the tax year, taking a Section 179 deduction, or claiming a special depreciation allowance.

Key Parts of the Form

The layout of Form 4562 follows the order of depreciation calculations. Part I is for the Section 179 expense deduction. Part II is for the special depreciation allowance (bonus depreciation). Part III is where regular MACRS depreciation is reported, with separate sections for GDS and ADS property. Part V is used for listed property, such as vehicles, which have special rules.