MACRS

The Modified Accelerated Cost Recovery System (MACRS) is the current method of accelerated asset depreciation required by the U.S. income tax code. Under MACRS, all assets are divided into classes which dictate the number of years over which an asset's cost will be recovered.

ACRS

Prior to the Accelerated Cost Recovery System (ACRS), most capital purchases were depreciated using a straight-line method that gave a linear depreciation of the asset over its useful life. ACRS was in force from 1975-1983 in the United States, under the Economic Recovery Tax Act (ERTA) of 1981. ACRS was unique in three ways: property class lives were established, calculations were based on an estimated salvage value of zero, and shorter recovery periods were used to calculate annual depreciation. This resulted in an accelerated write-off of capital costs (in comparison to that available using straight-line depreciation) and was the source of the name of course.

Depreciation under ACRS = 4 x Straight Line Depreciation

MACRS

MACRS replaced ACRS in the United States in 1986 with the passing of the Tax Reform Act of 1986 (TRA-86), as the depreciation method condoned by the IRS and is in force today. It is exceedingly similar to ACRS save for two key features; the number of property classes was expanded, and a half-year convention was added to simplify the first and final years of a property's recovery life. It was meant to stimulate capital purchasing by lowering the after-tax net present value, allowing for faster depreciation of capital assets. MACRS allows for more depreciation towards the beginning of the life of the capital asset (similar to double declining balance), allowing the depreciation tax-deductible to be taken sooner, thus allowing a company to retain more income early in the depreciation cycle. In essence, it's a more "front-loaded" tax benefit.

Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS.

Each system differs largely in the class lives of property, illustrated in the tables below.

MACRS Examples

For example, office equipment is depreciated with a class life of seven years, and water vessels are depreciated over ten years. Each MACRS class has a predetermined schedule, which determines the percentage of the asset's cost which is depreciated each year (see tables). Specifically, to calculate the depreciation charge for recovery tax year six of a Municipal sewage treatment plant that had an original cost of 2.2 Million:

1. Look up its property class (GDS class life): 15-Year property
2. Trace down the percentage table along 15-Year property to year 6: 6.23%
3. Multiply the original cost by the value found in the table: 0.0623 * $2,200,000 = $137,060

The depreciation charge is $137,060.

MACRS Property Classes Table

IRS Asset Classes	Asset Description	ADS Class Life	GDS Class Life
00.11	Office furniture, fixtures, and equipment	10	8
00.12	Information systems: computers/peripherals	6	5
00.22	Automobiles, taxis	2	5
00.241	Light general-purpose trucks	4	5
00.25	Railroad cars and locomotives	15	7
00.40	Industrial steam and electric distribution	22	3
01.11	Cotton gin assets	10	7
01.21	Cattle, breeding or dairy	7	5
13.00	Offshore drilling assets	7.5	5
13.30	Petroleum refining assets	16	10
15.00	Construction assets	6	5
20.10	Manufacture of grain and grain mill products	17	10
20.20	Manufacture of yarn, thread, and woven fabric	11	7
24.10	Cutting of timber	6	5
32.20	Manufacture of cement	20	15
20.1	Manufacture of motor vehicles	12	7
48.10	Telephone distribution plant	24	15
48.2	Radio and television broadcasting equipment	6	5
49.12	Electric utility nuclear production plant	20	15
49.13	Electric utility steam production plant	28	20
49.23	Natural gas production plant	14	7
50.00	Municipal wastewater treatment plant	24	15
80.00	Theme and amusement park assets	12.5	7

• The depreciation deduction for automobiles is limited to $7660 (maximum) the first tax year, $4900 the second, $2950 the third year, and $1775 per year in subsequent years.

MACRS GDS Property Classes Table

Property Class	Personal Property (all property except real-estate)
3-year property	Special 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 property	Information 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 property	All 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 property	Assets 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 property	Telephone distribution plants Municipal sewage treatment plants Property with ADR class life of 20 years or more and less than 25 years
20-year property	Municipal sewers Property with ADR class life of 25 years or more
Property Class	Real Property (real estate)
27.5-year property	Residential rental property (does not include hotels and motels)
39-year property	Non-residential real property

MACRS Applicable Percentage for Property Class

Recovery Year	3-Year Property	5-Year Property	7-Year Property	10-Year Property	15-Year Property	20-Year Property
1	33.33	20.00	14.29	10.00	5.00	3.750
2	44.45	32.00	24.49	18.00	9.50	7.219
3	14.81 *	19.20	17.49	14.40	8.55	6.677
4	7.41	11.52 *	12.49	11.52	7.70	6.177
5		11.52	8.93 *	9.22	6.93	5.713
6		5.76	8.92	7.37	6.23	5.285
7			8.93	6.55 *	5.90 *	4.888
8			4.46	6.55	5.90	4.522
9				6.56	5.91	4.462 *
10				6.55	5.90	4.461
11				3.28	5.91	4.462
12					5.90	4.461
13					5.91	4.462
14					5.90	4.461
15					5.91	4.462
16					2.95	4.461
17						4.462
18						4.461
19						4.462
20						4.461
21						2.231

• The 3-, 5-, 7-, and 10-year classes use 200% and the 15- and 20-year classes use 150% declining balance depreciation.
• All classes convert to straight-line depreciation in the optimal year, shown with an asterisk (*).
• A half-year depreciation is allowed in the first and last recovery years.
• If more than 40% of the year's MACRS property is placed in service in the last three months, then a mid-quarter convention must be used with depreciation tables that are not shown here.

MACRS Percentage for Real Property (real estate) Table

Recovery Year	Month 1	Month 2	Month 3	Month 4	Month 5	Month 6	Month 7	Month 8	Month 9	Month 10	Month 11	Month 12
1	2.461	2.247	2.033	1.819	1.605	1.391	1.177	0.963	0.749	0.535	0.321	0.107
2-39	2.564	2.564	2.564	2.564	2.564	2.564	2.564	2.564	2.564	2.564	2.564	2.564
40	0.107	0.321	0.535	0.749	0.963	1.177	1.391	1.605	1.819	2.033	2.247	2.461

• The useful life is 39 years for nonresidential real property. Depreciation is straight line using the mid-month convention. Thus a property placed in service in January would be allowed 11 1/2 months depreciation for recovery Year 1.

See also

• Depreciation
• Small business expenses and tax deductions
• Taxes Hub
• Accounting Hub

Sources

• U.S. Department of the Treasury, Internal Revenue Service Publication 946, How to Depreciate Property. Washington, DC: U.S. Government Printing Office. HTML PDF

This entry includes content from the following Wikipedia article: MACRS