What Is the MACRS Depreciation Method?

Depreciation is an accounting method that allocates the cost of a tangible asset over its useful life. For U.S. federal income tax, businesses must use the Modified Accelerated Cost Recovery System (MACRS) for most tangible property placed in service after 1986. This system allows for a faster recovery of an asset’s cost, which can provide tax benefits in the earlier years of its service. MACRS governs how businesses deduct asset costs over time to reduce their taxable income, and the Internal Revenue Service (IRS) provides the required guidelines and tables.

Core Components of MACRS

The MACRS framework has several components that determine the annual depreciation deduction. These elements must be correctly identified for each asset and include:

• The depreciation system (GDS or ADS)
• The property’s classification and recovery period
• The prescribed depreciation method
• The convention that establishes when the recovery period begins

MACRS Systems

MACRS has two systems for calculating depreciation: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS is the most common system and allows for an accelerated write-off of an asset’s cost by providing larger deductions in the early years. This front-loading of deductions is designed to encourage business investment.

The Alternative Depreciation System (ADS) can be required in specific situations or elected by a taxpayer. ADS uses the straight-line method over a longer recovery period than GDS, resulting in smaller, more even deductions. Its use is mandatory for assets used predominantly outside the U.S., property leased to a tax-exempt entity, or property financed with tax-exempt bonds.

Property Classes and Recovery Periods

MACRS groups assets into property classes, each with a predetermined recovery period, which is the number of years over which the cost can be depreciated. These IRS-defined periods may not match an asset’s actual useful life. Common classes for personal property include 3-year, 5-year, 7-year, 10-year, 15-year, and 20-year property.

For instance, 5-year property includes computers, office machinery, and vehicles, while office furniture and fixtures are classified as 7-year property. Real estate is divided into two classes: residential rental property with a 27.5-year recovery period, and nonresidential real property, which is depreciated over 39 years.

Depreciation Methods

Under GDS, the depreciation method is based on the asset’s property class. For assets in the 3, 5, 7, and 10-year classes, the 200% declining balance method is used, which doubles the straight-line rate for larger deductions in the first few years. For 15 and 20-year property, the 150% declining balance method is applied.

These declining balance methods automatically switch to the straight-line method in the year when that calculation yields an equal or greater deduction. This switch ensures the asset’s entire cost is recovered over its assigned life. For all real property, the straight-line method is required from the beginning.

Depreciation Conventions

Depreciation conventions determine how much depreciation can be claimed in the year an asset is placed in service and the year it is disposed of. The three conventions under MACRS are the half-year, mid-quarter, and mid-month conventions. The half-year convention is the default for personal property and treats all assets as placed in service in the middle of the tax year, allowing a half-year of depreciation.

The mid-quarter convention must be used for all personal property if more than 40% of its total basis is placed in service during the final three months of the tax year. This rule prevents businesses from claiming a full half-year of depreciation for significant year-end purchases. The mid-month convention is required for all real property, treating it as placed in service in the middle of the month it becomes available.

Information Required for Calculation

To calculate the MACRS depreciation deduction, a business must gather specific information for each asset. The required data includes the asset’s basis, its placed-in-service date, and its correct property class.

Determining the Asset’s Basis

The starting point for any depreciation calculation is the asset’s basis, which is its cost to the business. This includes the purchase price plus any additional expenses to make the asset operational, such as sales tax, shipping charges, and installation costs. For example, if a company buys machinery for $50,000 and pays $2,000 in sales tax, $1,000 for delivery, and $3,000 for installation, the basis for depreciation is $56,000. This full amount is recovered through depreciation deductions.

Identifying the Placed-in-Service Date

The placed-in-service date is when an asset is ready and available for its intended use, which may not be the purchase date. An asset is considered placed in service when it is installed and operational, even if not yet used. This date determines the tax year depreciation begins and which convention (half-year, mid-quarter, or mid-month) must be applied. Knowing the quarter an asset was placed in service is necessary to test for the 40% mid-quarter convention rule.

Assigning the Correct Property Class

An asset must be assigned to its correct property class, which dictates its recovery period and depreciation method. The IRS provides guidance in Publication 946, “How to Depreciate Property,” which lists assets and their class lives. For example, a delivery truck is 5-year property, while a commercial roof is 39-year nonresidential real property. Misclassifying an asset can lead to incorrect depreciation deductions and potential audit issues.

Calculating MACRS Depreciation

After determining an asset’s basis, placed-in-service date, and property class, a business can calculate the annual depreciation deduction. The IRS provides percentage tables that simplify this process and are the most common method for calculation. Using the official tables is recommended to reduce the likelihood of errors.

Using the IRS Percentage Tables

The easiest way to calculate MACRS depreciation is by using the percentage tables in IRS Publication 946. These tables incorporate the depreciation method, recovery period, and convention into annual percentages. To use this method, a business first determines the asset’s basis and property class.

For example, assume a business buys office furniture with a $10,000 basis. This is 7-year property, and the half-year convention applies. The business would find the table in Publication 946 for 7-year property using the 200% declining balance method and half-year convention.

For the first year, the table provides a rate of 14.29%. The deduction is calculated by multiplying the basis by this rate: $10,000 x 0.1429 equals a $1,429 deduction. For the second year, the table’s rate of 24.49% results in a $2,449 deduction. This process is repeated annually until the asset’s cost is fully depreciated.

Manual Calculation

While it is possible to calculate MACRS depreciation manually, the formulas are complex. For example, the first-year calculation for a 7-year asset with a $10,000 basis using the 200% declining balance method and half-year convention would be: ($10,000 / 7 years) x 200% x 0.5, which equals $1,428.57. Subsequent years’ calculations are based on the remaining balance. Due to the complexity and potential for error, most taxpayers use the IRS tables or tax software.

Special Rules and Reporting

MACRS includes special rules that can impact a business’s tax liability in the year an asset is acquired, such as bonus depreciation. After all calculations are complete, the final depreciation amounts must be reported to the IRS on the correct form.

Bonus Depreciation

Bonus depreciation allows a business to immediately deduct a percentage of the cost of qualifying new and used property. This deduction is taken after any Section 179 expense but before regular MACRS depreciation is calculated. The bonus depreciation percentage is being phased down; for property placed in service in 2025, the rate is 40%. The rate will decrease to 20% in 2026 and be eliminated in 2027.

For example, if a business places $50,000 of qualifying equipment in service in 2025, it can take an immediate $20,000 deduction ($50,000 x 0.40). The remaining $30,000 basis is then used to calculate regular MACRS depreciation. Bonus depreciation is not capped and can be taken on an unlimited amount of qualifying property.

Reporting on Form 4562

All depreciation and amortization deductions are reported to the IRS on Form 4562, “Depreciation and Amortization,” which is filed with the business’s annual income tax return. The form handles all components of cost recovery, including MACRS depreciation, Section 179 expensing, and bonus depreciation.

Part III of Form 4562 is used for the regular MACRS deduction. It requires listing the asset’s basis, placed-in-service date, property class, recovery period, convention, and depreciation method. The calculated deduction for the year is entered in the final column, while bonus depreciation is handled in Part II.