MACRS

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The Modified Accelerated Cost Recovery System (MACRS) is the current tax depreciation system in the United States. Under this system, the capitalized cost (basis) of tangible property is recovered over a specified life by annual deductions for depreciation. The lives are specified broadly in the Internal Revenue Code. The Internal Revenue Service (IRS) publishes detailed tables of lives by classes of assets. The deduction for depreciation is computed under one of two methods (declining balance switching to straight line or straight line) at the election of the taxpayer, with limitations.[1] See IRS Publication 946 for a 120 page guide to MACRS.

History[edit]

Tax deductions for depreciation have been allowed in the U.S. since the inception of the income tax. Prior to 1971, these deductions could be computed in a variety of manners over a wide range of lives, under old Bulletin F. In 1971, Congress introduced the Class Life Asset Depreciation Range (ADR) system in an attempt to simplify calculations and provide some uniformity. Under ADR, the IRS prescribed lives for classes of assets based on the nature or use of the asset. Such classes included general classes (such as office equipment) and industry classes (such as assets used in the manufacture of rubber goods). Taxpayers could use their choice of several methods of depreciating assets, including straight line, declining balance, and sum of years digits. Asset costs and accumulated depreciation were tracked by “vintage accounts” consisting of all assets within a class acquired in a particular tax year. All vintage accounts for the same year were assumed placed in service in the middle of the year; however, a taxpayer could elect the modified half year convention with potentially favorable results.

In 1981, Congress again changed the depreciation system,[2] providing generally for shorter lives for recovery of costs. Under the Accelerated Cost Recovery System (ACRS), broad groups of assets were assigned based on the old ADR lives (which the IRS has updated since). Taxpayers were permitted to calculate depreciation only under the declining balance method switching to straight line or the straight line method. Other changes applied as well.

The present MACRS system[3] was adopted as part of the Tax Reform Act of 1986.

California is the only state which does not fully conform its depreciation schedule to MACRS.[4]

Depreciable lives by class[edit]

Under MACRS a taxpayer must compute tax deductions for depreciation of tangible property using specified lives and methods. Assets are divided into classes by type of asset or by business in which the asset is used. (See tables of classes below.) Where a general class based on the nature of the asset applies (00.xx classes below), that class takes precedence over the use class.

For each class, three lives are specified: one for regular depreciation (GDS in the tables below), one for the alternative depreciation system (ADS), and a class life. Taxpayers may be required to use ADS or otherwise may elect which of the three lives to use. Lives for personal property vary from 3 years to 20 years. Land improvements must be depreciated over 15 or 20 years. Other real property must be depreciated over 27.5 years for residential property, 39 years for business property, and 40 years under ADS.

In addition, shorter lives are provided for certain property, including computers and peripheral equipment, certain high technology equipment, special purpose agricultural structures, and certain other items. MACRS also excluded certain property in regulated industries, as well as films, video tapes, and sound recordings, and certain other items. Also, leasehold improvements to realty are generally treated as real property under MACRS.

Depreciation methods[edit]

Only the declining balance method and straight line method of computing depreciation are allowed under MACRS. Taxpayers using the declining balance change to the straight line method at the point at which depreciation deductions are optimized. See the tables below. All tangible personal property acquired during the year is considered placed in service in the middle of the tax year (“half-year convention”). Real property is considered placed in service in the middle of the month in which acquired (“mid-month convention"). Special rules apply for pro rating deductions for short tax years and for the first year of business, or where more than 40% of tangible personal property additions are in the final quarter of the year.[5]

The method and life used in depreciating an asset is an accounting method, change of which requires IRS approval.[6]

Taxpayers may track the basis and accumulated depreciation of assets individually or in vintage accounts, as in the old ADR system. Where assets are tracked in vintage accounts, a first-in-first-out convention is usually applied to determine basis of assets retired.

Special allowances and bonus depreciation[edit]

At various times, additional depreciation deductions have been allowed to encourage investment. These allowances generally have had limitations. For example, an additional deduction of 50% of the cost of qualifying property is allowed for certain property acquired after December 31, 2007 and before January 1, 2011[7] A nearly identical allowance was available for property acquired after September 10, 2001 and before 2005. The IRS recently issued guidance clarifying when taxpayers are eligible for 100 percent bonus depreciation. In addition, the guidance provides procedures for electing 100 percent bonus depreciation and 50 percent bonus depreciation for certain property. In addition to extending the availability of bonus depreciation in general, the Tax Relief Act provided for a new 100 percent depreciation deduction for qualified property that is acquired and placed into service by the taxpayer between September 8, 2010, and January 1, 2014. [8] Special rules have also apply for biofuel, recycling, and disaster assistance property.[9]

Alternative depreciation system[edit]

Certain assets must be depreciated under an alternative depreciation system (ADS), using the ADS life and the straight line method.[10] Generally, this applies to assets used outside the United States. The ADS may be applied at the election of the taxpayer in lieu of regular depreciation. In addition, the ADS must be used for computing depreciation deductions for the Alternative Minimum Tax. ADS lives are the same as regular depreciation lives for a few classes, but are generally somewhat longer than regular lives for most classes.

Example[edit]

The following example is extracted from IRS Publication 946:

You bought office furniture (7-year property) for $10,000 and placed it in service on October 13, 2013. You use the furniture only for business.

Part I
1. MACRS system (GDS or ADS)GDS
2. Property class7-year
3. Date placed in service8/11/10
4. Recovery period7-Year
5. Method and convention200%DB/Half-Year
6. Depreciation rate (from tables).1429
Part II
7. Cost or other basis*$10,000
8. Business/investment use100%
9. Multiply line 7 by line 8$10,000
10. Total claimed for section 179 deduction and other items-0-
11. Subtract line 10 from line 9. This is your tentative basis for depreciation$10,000
12. Multiply line 11 by .50 if the 50% special depreciation allowance applies. Multiply line 11 by 1.00 if the 100% special depreciation allowance applies. This is your special depreciation allowance. Enter -0- if this is not the year you placed the property in service, the property is not qualified property, or you elected not to claim a special allowance-0-
13. Subtract line 12 from line 11. This is your basis for depreciation$10,000
14. Depreciation rate (from line 6).1429
15. Multiply line 13 by line 14. This is your MACRS depreciation deduction$1,429
*If real estate, do not include cost (basis) of land.

Multiple-asset accounts[edit]

A taxpayer may group assets together into a general asset account. The grouped assets must have the same life, method of depreciation, convention, additional first year depreciation percentage, and year (or quarter or month) placed in service. Listed property or vehicles cannot be grouped with other assets. Depreciation for the account is computed as if the entire account were a single asset.[11]

Retirement of MACRS assets[edit]

Gain or loss may be deferred or recognized on retirement of assets under MACRS, at the taxpayer's election. Under default rules, proceeds from disposing of a depreciable asset in a multiple asset account are recognized as ordinary income, and depreciation on the account is unaffected by the retirement. An optional method allows the asset to be removed from the account at the start of the year from retirement, in which case gain or loss is on the asset is subject to regular rules.[12]

MACRS property classes table[edit]

From IRS Publication 946 Excerpt from Table B-1 (many asset classes omitted here)

IRS Asset ClassesAsset DescriptionADS Class LifeGDS Class Life
00.11Office furniture, fixtures, and equipment107
00.12Information systems: computers/peripherals65
00.22Automobiles, taxis25
00.241Light general-purpose trucks45
00.25Railroad cars and locomotives157
00.40Industrial steam and electric distribution2215
01.11Cotton gin assets127
01.21Cattle, breeding or dairy75
13.00Offshore drilling assets7.55
13.30Petroleum refining assets1610
15.00Construction assets65
20.10Manufacture of grain and grain mill products1710
20.20Manufacture of yarn, thread, and woven fabric117
24.10Cutting of timber65
32.20Manufacture of cement2015
20.1Manufacture of motor vehicles127
48.10Telephone distribution plant2415
48.2Radio and television broadcasting equipment65
49.12Electric utility nuclear production plant2015
49.13Electric utility steam production plant2820
49.23Natural gas production plant147
50.00Municipal waste water treatment plant2415
57.0Distributive trades, and services95
80.00Theme and amusement park assets12.57

MACRS GDS property classes table[edit]

Property ClassPersonal Property (all property except real-estate)
3-year propertySpecial handling devices for food and beverage manufacture.
Special tools for the manufacture of finished plastic products, fabricated metal products, and motor vehicles
Property with ADR class life of 4 years or less
5-year propertyInformation Systems; Computers / Peripherals
Aircraft and parts (of non-air-transport companies)
Computers
Petroleum drilling equipment
Property with ADR class life of more than 4 years and less than 10 years
Certain geothermal, solar, and wind energy properties.
7-year propertyAll other property not assigned to another class
Office furniture, fixtures, and equipment
Property with ADR class life of more than 10 years and less than 16 years
10-year propertyAssets used in petroleum refining and certain food products
Vessels and water transportation equipment
Property with ADR class life of 16 years or more and less than 20 years
15-year propertyTelephone distribution plants
Municipal sewage treatment plants
Property with ADR class life of 20 years or more and less than 25 years
20-year propertyMunicipal sewers
Property with ADR class life of 25 years or more
Property ClassReal Property (real estate)
27.5-year propertyResidential rental property (does not include hotels and motels)
39-year propertyNon-residential real property

MACRS applicable percentage for property class[edit]

From IRS Publication 946 Table A-1. Other tables are available for options different than those shown below.

MACRS applicable percentage for property class
Recovery Year3-Year5-Year7-Year10-Year15-Year20-Year
133.3320.0014.2910.005.003.750
244.4532.0024.4918.009.507.219
314.81 *19.2017.4914.408.556.677
47.4111.52 *12.4911.527.706.177
511.528.93 *9.226.935.713
65.768.927.376.235.285
78.936.55 *5.90 *4.888
84.466.555.904.522
96.565.914.462 *
106.555.904.461
113.285.914.462
125.904.461
135.914.462
145.904.461
155.914.462
162.954.461
174.462
184.461
194.462
204.461
212.231

MACRS percentage for real property table[edit]

Recovery YearMonth 1Month 2Month 3Month 4Month 5Month 6Month 7Month 8Month 9Month 10Month 11Month 12
12.4612.2472.0331.8191.6051.3911.1770.9630.7490.5350.3210.107
2-392.5642.5642.5642.5642.5642.5642.5642.5642.5642.5642.5642.564
400.1070.3210.5350.7490.9631.1771.3911.6051.8192.0332.2472.461

See also[edit]

Sources[edit]

References[edit]

  1. ^ Note that under 26 USC 179, taxpayers may elect to claim a deduction for the full basis of certain amounts of property placed in service during the taxable year, subject to limitations. This election supersedes MACRS deductions for the basis so deducted.
  2. ^ Economic Recovery Tax Act of 1981.
  3. ^ 26 USC 168; 26 CFR 1.168(a)-1, et seq.
  4. ^ Mark Robyn. 2012 State Business Tax Climate Index. Tax Foundation. January 2012
  5. ^ 26 CFR 1.168(d)-1.
  6. ^ See IRS Form 3115 and instructions.
  7. ^ 26 USC 168(k), which has been amended numerous times.
  8. ^ McDermott Will & Emery (April 21, 2011). "IRS Clarifies When 100 Percent Bonus Depreciation Applies". The National Law Review. Retrieved 2012-04-16.  and American Taxpayer Relief Act of 2012
  9. ^ 26 USC 168(l), (m), and (n).
  10. ^ 26 USC 168(g).
  11. ^ 26 CFR 1.168(i)-1T
  12. ^ 26 CFR 1.168(i)-1T(e) and 26 CFR 1.168(i)-8T