What Qualifies as MACRS Property for Depreciation?

The Modified Accelerated Cost Recovery System (MACRS) is the required tax depreciation method for most tangible property placed in service after 1986. It allows businesses and investors to recover the cost of assets that wear out, become obsolete, or lose value over time. This system provides a structured way to deduct an asset’s cost over a specific recovery period, which can impact a taxpayer’s annual taxable income. The purpose of MACRS is to provide a framework for calculating these annual depreciation deductions.

Identifying MACRS Property

To qualify for depreciation under MACRS, an asset must meet three criteria:

• The property must be tangible, meaning it can be physically touched.
• It must be used in a trade or business or held for the production of income, such as rental property.
• It must have a determinable useful life that extends substantially beyond one year, as assets expected to last less than a year are expensed directly.

For example, a delivery truck, manufacturing equipment, or an office building are all examples of MACRS property. They are physical assets used in business operations and are expected to provide value for multiple years. The system accounts for the gradual loss of value as they are used.

Certain types of property are excluded from MACRS depreciation. Land is a primary example because it is not considered to have a determinable useful life and does not wear out. Intangible assets, such as patents and copyrights, are not depreciable under MACRS; their costs are recovered through a process called amortization. Inventory held for sale to customers is also excluded because its cost is recovered through the cost of goods sold.

Calculating the MACRS Deduction

Depreciation Systems

The calculation of a MACRS deduction begins with selecting the appropriate depreciation system: the General Depreciation System (GDS) or the Alternative Depreciation System (ADS). GDS is the most commonly used system and is required unless the law mandates the use of ADS or a taxpayer elects it. GDS allows for a faster recovery of an asset’s cost by using accelerated depreciation methods, providing larger deductions in the early years of an asset’s life.

The Alternative Depreciation System is mandatory for certain property, such as assets used mainly outside the U.S., property financed with tax-exempt bonds, and property used by a tax-exempt entity. A taxpayer can also irrevocably elect ADS for any class of property. ADS uses the straight-line method over a longer recovery period than GDS, resulting in smaller, uniform deductions each year.

Property Class and Recovery Period

After selecting a system, the property must be classified to determine its recovery period. Under GDS, assets are assigned to property classes based on their nature. Common classes for personal property include:

• 3-year property (some horses)
• 5-year property (computers, office machinery, vehicles)
• 7-year property (office furniture, fixtures, and most other business equipment)

Real property is divided into two main classes: 27.5-year residential rental property and 39-year nonresidential real property. Residential rental property includes buildings where 80% or more of the gross rental income comes from dwelling units. Nonresidential real property is any real property that is not residential rental property. Land improvements, such as fences, roads, and sidewalks, are classified as 15-year property.

Applicable Convention

The final component for the MACRS calculation is the applicable convention. The convention determines the portion of the year for which depreciation is claimed when an asset is placed in service or disposed of. The Half-Year convention is the most common and treats all property placed in service during the year as having been placed in service in the middle of that year, allowing for a half-year of depreciation.

The Mid-Quarter convention must be used for all personal property if more than 40% of the total cost basis of such property is placed in service during the final three months of the tax year. This rule prevents taxpayers from purchasing a large volume of assets at year-end to claim a full half-year of depreciation.

The Mid-Month convention is required for all residential rental and nonresidential real property. It treats property as being placed in service or disposed of in the middle of the month, regardless of the actual day.

Special Depreciation Options

Section 179 Expensing

The Section 179 deduction allows a business to elect to treat the cost of qualifying property as an immediate expense rather than capitalizing and depreciating it over time. This option helps businesses reduce their current tax liability. Qualifying property is tangible personal property, such as machinery and equipment, purchased for use in a trade or business.

The Section 179 deduction is subject to annual limits. For 2025, the maximum deduction is $1,250,000. This deduction is phased out if the total cost of property placed in service during the year exceeds a threshold of $3,130,000 for 2025. The total Section 179 deduction also cannot exceed the taxpayer’s net business income for the year.

Bonus Depreciation

Bonus depreciation, also known as the special depreciation allowance, allows for the immediate deduction of a specified percentage of the cost of qualified property in the year it is placed in service. Qualified property includes new and used tangible property with a MACRS recovery period of 20 years or less, computer software, and certain improvement property. Unlike Section 179, there is no business income limitation for bonus depreciation.

The percentage for bonus depreciation is being phased down. The rate is 60% for property placed in service in 2024, 40% in 2025, and 20% in 2026, before being eliminated in 2027 unless extended by Congress. If an asset is eligible for both, the Section 179 deduction is applied first to the asset’s cost. Bonus depreciation is then calculated on the remaining basis, followed by the regular MACRS depreciation.

Reporting Depreciation on Your Tax Return

Depreciation deductions are reported on IRS Form 4562, Depreciation and Amortization. This form is used by any business or individual claiming depreciation, a Section 179 expense deduction, or amortization. It is filed along with the main income tax return, such as Form 1040, 1120, or 1065.

Form 4562 is organized into several parts. Part I is used for the Section 179 expense election, where you list the qualifying property and calculate the total deduction, subject to the annual limits. Any carryover of a disallowed deduction from a prior year is also reported in this section.

Bonus depreciation is reported in Part II of Form 4562, which is for claiming the additional first-year depreciation for qualified property.

Regular MACRS depreciation for assets placed in service during the current tax year is calculated and reported in Part III. This part requires detailing the property’s basis, recovery period, convention, and depreciation method. Depreciation for assets placed in service in prior years is reported on other appropriate tax schedules.