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. See IRS Publication 946 for a 120-page guide to MACRS.
History
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, 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 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.
Depreciable lives by class
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
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.
The method and life used in depreciating an asset is an accounting method, change of which requires IRS approval.