What Are MACRS Deductions and How Do They Work?

The Modified Accelerated Cost Recovery System (MACRS) is the mandatory method for calculating depreciation deductions on tangible property for U.S. federal tax purposes. It allows businesses to recover the cost of assets as they lose value over time. The process is designed to reflect an asset’s depreciation more rapidly in the initial years of its service life.

Core Components of MACRS Depreciation

The starting point for any calculation is the property’s basis. This is the amount paid for the asset, including costs associated with the purchase, such as shipping, installation, and sales tax. The basis is the total figure that will be recovered through depreciation deductions over the asset’s life.

With the basis established, the taxpayer must identify the appropriate depreciation system. The Internal Revenue Service (IRS) provides two: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS is the most frequently used system and applies to most types of property. The ADS method provides for a slower, straight-line rate of depreciation and is required for certain types of property, such as assets used predominantly outside the U.S.

The asset must be assigned to a property class, which dictates its recovery period, or the number of years over which the cost can be deducted. The IRS categorizes assets into classes based on their expected useful life. For example, computers and vehicles are classified as 5-year property, while office furniture and fixtures fall into the 7-year property class.

Real estate is treated differently. Residential rental properties are assigned a 27.5-year recovery period, and nonresidential real property, like commercial office buildings, is given a 39-year recovery period.

The final component is selecting the applicable convention, which determines the portion of the year for which depreciation can be claimed when an asset is first used. The half-year convention is standard for most personal property, treating all assets as placed in service in the middle of the tax year. The mid-quarter convention must be used if more than 40% of the total basis of personal property is placed in service during the final three months of the tax year. For real property, the mid-month convention applies, treating the property as placed in service in the middle of the month it was acquired.

Methods for Calculating the Deduction

The most straightforward method involves using the percentage tables provided by the IRS in Publication 946, How To Depreciate Property. These tables integrate the system, class, convention, and depreciation method into a single percentage for each year of the recovery period.

To use the tables, select the correct one based on the depreciation system and convention. Next, locate the row for the current recovery year and the column that matches the property’s class life, such as 5-year or 7-year property.

The percentage found is then multiplied by the asset’s original unadjusted basis. For example, a business purchases equipment for $10,000 that is 5-year property under GDS with the half-year convention. The first-year table rate is 20.00%, so the depreciation deduction would be $10,000 multiplied by 20.00%, resulting in a $2,000 deduction.

For the second year, the table provides a rate of 32.00%, leading to a $3,200 deduction. This process continues for each year of the recovery period until the full basis is depreciated. The original basis must be used in the calculation each year, not the basis reduced by prior depreciation.

Related Depreciation Options

The Section 179 deduction allows a business to elect to treat the cost of qualifying property as an expense in the year it is placed in service, rather than depreciating it over time. For 2025, a business can expense up to $1,250,000, though this deduction begins to phase out if the total cost of property placed in service exceeds $3,130,000. Qualifying property is generally tangible personal property, such as machinery and equipment, purchased for business use. The deduction cannot exceed the taxpayer’s net taxable income for the year, and the decision to use it is made on an asset-by-asset basis.

Bonus depreciation allows for an additional first-year deduction for qualified new and used property. Unlike Section 179, bonus depreciation is not subject to an annual dollar limit or a taxable income limitation. The rate is 40% for property placed in service in 2025, 20% in 2026, and is eliminated in 2027.

When bonus depreciation is taken, a business first deducts this amount from the asset’s basis. The remaining basis is then depreciated over the asset’s recovery period using standard MACRS rules. Taxpayers can elect out of bonus depreciation, but it is otherwise automatically applied to qualifying property.