TOPIC
Property Depreciation Methods: MACRS
Last Updated August 23, 2022
Depreciation represents the decline in the value of property, and erosion of investment in that property, that occurs over time. Since the erosion of investment continues until the property can no longer be used, the tax code grants taxpayers depreciation allowances as a mechanism for recovering the capital invested in an asset.
The modified accelerated cost recovery system (MACRS) is used to depreciate all tangible property placed in service after Dec. 31, 1986 (except certain tangible property). MACRS (and its predecessor, ACRS) was intended to alleviate several income tax problems, such as complex computations, salvage value estimates, useful life litigation, and other similar issues. ACRS remains in effect for property placed in service during 1981 through 1986.
What information is needed to determine an asset’s MACRS deduction?
To calculate MACRS depreciation expense, at a minimum, a taxpayer must:
- Identify the item of depreciable property (often referred to as the “asset”)
- Determine whether the property is depreciable
- Determine who may take depreciation
- Determine the depreciable basis
- Determine when the property is considered to be placed in service
- Determine whether the property is eligible for bonus depreciation
- Determine the applicable recovery period
- Determine the applicable depreciation method (e.g., 200% declining balance, 150% declining balance, or straight-line method)
- Determine the applicable placed-in-service convention (e.g., midmonth, half-year, or midquarter)
- Determine whether to make any available depreciation elections
Download: Bonus Depreciation Final Rules
On Sept. 21, 2020, the Treasury and IRS released final regulations under T.D. 9916 impacting bonus depreciation rules. This complimentary OnPoint – a set of ready-to-use presentation slides – outlines key aspects of the final regulations.
What requirements must be met for property to be depreciable under §168?
To be depreciable under MACRS, property must be tangible and of a character subject to the allowance for depreciation (often referred to as a “wasting asset”). The property must also be used in a trade or business or held for the production of income. Though there are exceptions, most tangible property of this type is subject to wear and tear and is therefore a wasting asset.
What are the MACRS recovery classes?
MACRS provides eight categories of property with a recovery period assigned to each category. In addition, MACRS provides three categories that cover most real estate: residential rental property with a 27.5-year recovery period, nonresidential real property with a 31.5-year recovery period, and nonresidential real property with a 39-year recovery period. The categories include property with recovery periods ranging from 3 years to 25 years.
[Bloomberg Tax Research subscribers can access a full breakdown of property categories. Don’t have access? Request a demo.]
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How is the applicable recovery period determined?
Under §168(c), the “applicable recovery period” is determined by the recovery class of the property. Under §168(e), most personal property is placed in three-year, five-year, seven-year, 10-year, 15-year or 20-year classes. The 15-year and 20-year recovery classes generally include inherently permanent assets, such as land improvements. Most other real estate assets, such as buildings, are placed in the 27.5-year, 31.5-year, or 39-year recovery classes. Railroad grading and tunnel bores are placed in the 50-year category.
Under ACRS, most personal property is placed in the three-year, five-year, or 10-year recovery class, and most realty is placed in the 15-year, 18-year, 19-year, or low-income housing recovery class, depending on its nature and the date it was placed in service. The unadjusted basis of the asset (generally its cost) is recovered over the period reflected by its recovery class, although the taxpayer can elect a longer recovery period.
Depreciation Challenges for “Flip-Flop” Conformity States
Learn how to untangle the complexity created by states that have gone back and forth between conforming and not conforming with federal bonus depreciation (“flip-flop” states).
What is additional first-year depreciation (bonus depreciation)?
Under the bonus depreciation rules, a taxpayer may deduct in the property’s placed-in-service year, rather than capitalize and recover through MACRS, a percentage of the adjusted basis of qualified property. The adjusted basis of the property is reduced by the amount of this additional first-year depreciation (and by the amount of any first-year expensing under other code provisions, such as §179) before the MACRS deduction for the year in which the property is placed in service and subsequent years is computed.
Three Ways to Detangle State Conformity
Read about three things you can start doing today to help you navigate the varied treatment of fixed assets depreciation across the 50 states.
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PORTFOLIO
Portfolio 531-3rd: Depreciation: MACRS and ACRS
Read expert guidance on how to determine the depreciation deduction according to §168, as well as a detailed comparison of the two depreciation methods.
PORTFOLIO
Portfolio 532-2nd: First-Year Expensing and Additional Depreciation
A reference tool for determining the first-year expensing and additional depreciation deductions available for selected properties.
PRACTICE TOOL
Tax Practice Series: Deductions – ¶2370: Depreciation Of Realty And Tangible Property
Written by leading federal tax authorities, the Tax Practice Series contains over 275 chapters that cover virtually every taxation topic.
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