FIGURING DEPRECIATION UNDER MACRS

Internal Revenue Service
United States Department of the Treasury

Link: http://www.irs.gov/publications

Introduction

The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. You generally must use GDS unless you are specifically required by law to use ADS.

Required use of ADS. You must use ADS for the following property.
- Listed property used 50% or less in a qualified business use.
- Any tangible property used predominantly outside the United States during the year.
- Any tax-exempt use property.
- Any tax-exempt bond-financed property.
- All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect.
- Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts.

If you are required to use ADS to depreciate your property, you cannot claim any special depreciation allowance for the property. Although your property may qualify for GDS, you can elect to use ADS. The election generally must cover all property in the same property class that you placed in service during the year. Once you make this election, you can never revoke it.

Which Property Class Applies Under GDS?

The following is a list of the nine property classifications under GDS and examples of the types of property included in each class.
  1. 3-year property.
    - Tractor units for over-the-road use.
    - Any race horse over 2 years old when placed in service. (All race horses placed in service after December 31, 2008, and before January 1, 2014, are deemed to be 3-year property, regardless of age.)
    - Any other horse (other than a race horse) over 12 years old when placed in service.
    - Qualified rent-to-own property (defined later).
  2. 5-year property.
    - Automobiles, taxis, buses, and trucks.
    - Computers and peripheral equipment.
    - Office machinery (such as typewriters, calculators, and copiers).
    - Any property used in research and experimentation.
    - Breeding cattle and dairy cattle.
    - Appliances, carpets, furniture, etc., used in a residential rental real estate activity.
    - Certain geothermal, solar, and wind energy property.
  3. 7-year property.
    - Office furniture and fixtures (such as desks, files, and safes).
    - Agricultural machinery and equipment.
    - Any property that does not have a class life and has not been designated by law as being in any other class.
    - Certain motorsports entertainment complex property placed in service before January 1, 2010 (defined later).
    - Any natural gas gathering line placed in service after April 11, 2005.
  4. 10-year property.
    - Vessels, barges, tugs, and similar water transportation equipment.
    - Any single purpose agricultural or horticultural structure.
    - Any tree or vine bearing fruits or nuts.
    - Qualified small electric meter and qualified smart electric grid system (defined later) placed in service on or after October 3, 2008.
  5. 15-year property.
    - Certain improvements made directly to land or added to it (such as shrubbery, fences, roads, sidewalks, and bridges).
    - Any municipal wastewater treatment plant.
    - Any qualified leasehold improvement property placed in service before January 1, 2010.
    - Any qualified restaurant property placed in service before January 1, 2010.
    - Initial clearing and grading land improvements for gas utility property.
    - Electric transmission property used in the transmission at 69 or more kilovolts of electricity placed in service after April 11, 2005.
    - Any natural gas distribution line placed in service after April 11, 2005.
  6. 20-year property.
    - Farm buildings (other than single purpose agricultural or horticultural structures).
    - Municipal sewers not classified as 25-year property.
    - Initial clearing and grading land improvements for electric utility transmission and distribution plants.
  7. 25-year property. This class is water utility property, which is either of the following.
    - Property that is an integral part of the gathering, treatment, or commercial distribution of water, and that, without regard to this provision, would be 20-year property.
    - Municipal sewers other than property placed in service under a binding contract in effect at all times since June 9, 1996.
  8. Residential rental property. This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy.
  9. Nonresidential real property, such as an office building, store, or warehouse, that is neither residential rental property nor property with a class life of less than 27.5 years.
If your property is not listed above, you can determine its property class from the Table of Class Lives and Recovery Periods.

What Is the Basis for Depreciation?

The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use.

Which Recovery Period Applies?

The recovery period of property is the number of years over which you recover its cost or other basis. It is determined based on the depreciation system (GDS or ADS) used.

Recovery Periods Under GDS

Property Class Recovery Period
3-year property 3 years
5-year property 5 years
7-year property 7 years
10-year property 10 years
15-year property 15 years
20-year property 20 years
25-year property 25 years
Residential rental property 27.5 years
Nonresidential real property 39 years


Recovery Periods Under ADS
The recovery periods for most property generally are longer under ADS than they are under GDS. The following table shows some of the ADS recovery periods.
Property Recovery
Period
Rent-to-own property 4 years
Automobiles and light duty trucks 5 years
Computers and peripheral equipment 5 years
High technology telephone station equipment installed on customer premises 5 years
High technology medical equipment 5 years
Personal property with no class life 12 years
Natural gas gathering lines 14 years
Single purpose agricultural and horticultural structures 15 years
Any tree or vine bearing fruit or nuts 20 years
Initial clearing and grading land
improvements for gas utility property 		20 years
Initial clearing and grading land
improvements for electric utility
transmission and distribution plants 		25 years
Electric transmission property used in the transmission at 69 or more kilovolts of electricity 30 years
Natural gas distribution lines 35 years
Any qualified leasehold improvement property 39 years
Any qualified restaurant property 39 years
Nonresidential real property 40 years
Residential rental property 40 years

Which Convention Applies?

Under MACRS, averaging conventions establish when the recovery period begins and ends. The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property.

The mid-month convention. Use this convention for nonresidential real property, residential rental property, and any railroad grading or tunnel bore. Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of.

The mid-quarter convention. Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last 3 months of the tax year (excluding nonresidential real property, residential rental property, any railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property that is being depreciated under a method other than MACRS) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. This means that 1? months of depreciation is allowed for the quarter the property is placed in service or disposed of.

The half-year convention. Use this convention if neither the mid-quarter convention nor the mid-month convention applies. Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of.

Which Depreciation Method Applies?

MACRS provides three depreciation methods under GDS and one depreciation method under ADS.
- The 200% declining balance method over a GDS recovery period.
- The 150% declining balance method over a GDS recovery period.
- The straight line method over a GDS recovery period.
- The straight line method over an ADS recovery period.

Table 3 lists the types of property you can depreciate under each method. It also gives a brief explanation of the method, including any benefits that may apply.

Table 3. Depreciation Methods

Note. The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL.
Method Type of Property Benefit
GDS using 200% DB • Nonfarm 3-, 5-, 7-, and 10-year property • Provides a greater deduction during the earlier recovery years
• Changes to SL when that method provides an equal or greater deduction
GDS using 150% DB • All farm property (except real property)
• All 15- and 20-year property (except qualified leasehold improvement property and qualified restaurant property placed in service before January 1, 2010)
• Nonfarm 3-, 5-, 7-, and 10-year property 		• Provides a greater deduction during the earlier recovery years
• Changes to SL when that method provides an equal or greater deduction
GDS using SL • Nonresidential real property
• Qualified leasehold improvement property placed in service before January 1, 2010
• Qualified restaurant property placed in service before January 1, 2010
• Residential rental property
• Trees or vines bearing fruit or nuts
• Water utility property
• All 3-, 5-, 7-, 10-, 15-, and 20-year property
• Property for which you elected section 168(k)(4) 		• Provides for equal yearly deductions (except for the first and last years)
ADS using SL • Listed property used 50% or less for business
• Property used predominantly outside the U.S.
• Qualified leasehold improvement property placed in service before January 1, 2010
• Qualified restaurant property placed in service before January 1, 2010
• Tax-exempt property
• Tax-exempt bond-financed property
• Farm property used when an election not to apply the uniform capitalization rules is in effect
• Imported property
• Any property for which you elect to use this method		 • Provides for equal yearly deductions

How Is the Depreciation Deduction Figured?

To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed in service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Then, you are ready to figure your depreciation deduction. You can figure it using a percentage table provided by the IRS, or you can figure it yourself without using the table. You can use this worksheet to help you figure your depreciation deduction using the percentage tables.

Part I
1. MACRS system (GDS or ADS) GDS
2. Property class 7-year
3. Date placed in service 8/11/08
4. Recovery period 7-Year
5. Method and convention 200%DB/Half-Year
6. Depreciation rate (from tables) .1429

Sale or Other Disposition Before the Recovery Period Ends

If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property.

Half-year convention used. For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year.

Mid-quarter convention used. For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property.

Quarter Percentage
First 12.5%
Second 37.5
Third 62.5
Fourth 87.5

Mid-month convention used. If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. The denominator is 12.

Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables.

Declining balance rate. You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. For example, for 3-year property depreciated using the 200% declining balance method, divide 2.00 (200%) by 3 to get 0.6667, or a 66.67% declining balance rate. For 15-year property depreciated using the 150% declining balance method, divide 1.50 (150%) by 15 to get 0.10, or a 10% declining balance rate. The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction.
Property Class Method Declining Balance Rate Year
3-year 200% DB 66.667% 3rd
5-year 200% DB 40.0 4th
7-year 200% DB 28.571 5th
10-year 200% DB 20.0 7th
15-year 150% DB 10.0 7th
20-year 150% DB 7.5 9th