TABLE OF CONTENTS
- What Is MACRS Depreciation?
- How to Calculate MACRS Depreciation
- MACRS Depreciation Calculation Example
- Putting the Modified Accelerated Cost Recovery System to Use
The Modified Accelerated Cost Recovery System (MACRS) depreciation is a federal income tax convention. It benefits your company by helping you plan for the decrease of your assets’ value over a set period. More specifically, MACRS enables you to calculate the depreciation expense — the percentage of assets your business can write off — throughout its useful life.
Here’s how to calculate the MACRS depreciation basis of your assets, the 4 methods used to write off different depreciable assets and how and when to take advantage of MACRS convention periods.
What Is MACRS Depreciation?
The IRS introduced the Modified Accelerated Cost Recovery System (MACRS), a depreciation method used for accounting purposes, in 1986. Very simply, the general MACRS depreciation formula allows for a larger tax deduction in the early years of an asset’s useful life and less as time goes by. This is in contrast to straight-line depreciation, where you claim the same deduction year after year.
MACRS depreciation schedule is only used for business assets that your company bought after 1986. If you depreciate property your company bought before 1987, use the Accelerated Cost Recovery System (ACRS).
How to Calculate MACRS Depreciation
To calculate depreciation under MACRS:
- Determine your basis, namely the original value of that asset.
- Determine your property’s class. Assets are organized into different categories based on their useful life. A specific recovery period (the number of years you can claim a deduction) is defined for each property class. Use the MACRS Depreciation Methods Table (in IRS Pub 946) to figure out the asset class.
- Determine your depreciation method. Assets are classed into the 200% Declining Balance method (using the General Depreciation System (GDS), the 150% Declining Balance method using GDS, the Straight-Line method under GDS or the Straight-Line method under the Alternative Depreciation System (ADS). Use the MACRS Depreciation Methods Table (in IRS Pub 946) to figure out the depreciation method of your asset.
- Choose your MACRS depreciation convention, namely the time you first started using that asset. There are 3 conventions: Mid-Month, Mid-Quarter and Half-Year.
- Determine your percentage. With the results of your calculations, use the MACRS Percentage Table and Depreciation Rate Tables (in IRS Pub 946) to determine the percentage of your asset’s value you can itemize as a deduction.
Alternatively, you can use a MACRS Tax Depreciation Calculator to determine your deductions.
Determine the Basis
The basis is simply how much you pay for your purchase, including:
- The purchase price of the asset
- The sales tax
- Shipping and delivery costs
- Installation charges (if any). Example: The amount paid to install the equipment or furniture at your place of business.
- Other costs. For instance, if a technician had to come out and calibrate your new machine before you could use it. The amount paid to the technician is included in the cost basis of the machine.
Determine Property Class
The IRS groups all depreciable assets into 8 classes ranging from 3 years to just over 31 years. Here’s a description:
Classes are determined according to the usefulness, or recovery period, of the particular asset. So, you’ll find your computer, for instance, in the 5-year category. On the other hand, your office furniture is in the 7-year slot, and your office or other non-residential real estate property is in the very last spot of 31+ years.
Determine Depreciation Method
MACRS depreciation schedule gives you 3 methods under the General Depreciation System (GDS) and 1 depreciation method under the Alternative Depreciation System (ADS).
The GDS is the most commonly used MACRS system for calculating depreciation and uses the declining-balance (DB) method to depreciate assets (more on that later).
The ADS, in contrast, is used only on property in special circumstances.
The MACRS depreciation methods include:
- GDS using 200% DB: 3-year, 5-year, 7-year and 10-year classes use the 200% Declining Balance Method (GDS) – This tax depreciation method gives you a significant tax deduction in the earliest years. The 200%, or double-declining depreciation, simply means that the depreciation rate is double the straight-line depreciation rate used for later property classes.
- GDS using 150% DB: 15-year and 20-year classes use 150% Declining Balance method (GDS) – This depreciation method gives you a higher depreciation rate – 150% more than the straight-line method.
- GDS using SL: 27 years – This tax depreciation method uses the straight-line formula under the GDS that calculates an even depreciation amount over the asset’s life.
- ADS using SL: 31+ years – This class is for listed property used less than 50% of the time for business. Property owners use the straight-line method over an ADS recovery period, giving your property a more extended recovery period, thus decreasing the annual deduction.
The current MACRS model allows you to choose the depreciation method that most benefits your business. So you can apply the 150% DB method to the 3-, 5-, 7- and 10-year property classes if you wish. You can also apply the GDS using SL to all 3, 5-, 7-, 10- and 20-year properties.
The declining balance, also known as the double-declining balance method, lets you write off more of an asset’s value right after you buy it and less as time goes on.
Who it’s for: Businesses that want to recover more of an asset’s value upfront. This is useful if you’ve just opened a shop and have a lot of expenses in your first year — any extra cash helps.
With straight-line depreciation, you write off the same amount of expense each year, so you’re evenly splitting off your asset’s value over multiple years.
Who it’s for: Small businesses expecting net losses. Thus, businesses cannot benefit from the accelerated depreciation method.
The MACRS convention establishes when the recovery period of an asset begins and ends. There are 3 types of conventions.
|Mid-Month||This convention only applies to residential rental property, nonresidential real property and railroad grading or tunnel bore. You get half-a-month’s worth of depreciation for the month the asset is placed in service or disposed of. A full month of depreciation is allowed for each additional month the asset is in service during the tax year.|
|Mid-Quarter||This convention gives you just slightly over 1 month’s worth of depreciation for the quarter in which you purchased the asset. The mid-quarter convention should only be used if more than 40% of your depreciable assets are purchased during the last 3 months of the tax year.|
|Half-Year||The MACRS half-year convention gives you half-a-year’s worth of depreciation regardless of how long you used that asset during the year.|
It’s a good idea to use the half-year option over the mid-quarter since the MACRS half-year convention helps you buy extra time and saves money. So you can, for instance, install a computer network in September and itemize 6-month’s worth of depreciation, resulting in more significant tax savings.
Most tax preparation software calculates which convention applies to your tax situation when you enter the date you purchased the property. Alternatively, you can use the tax tables in IRS Publication 946 to determine your convention and depreciation rates.
Reference Appropriate MACRS Depreciation Table
MACRS gives you 3 tables to determine your depreciation rate. These are:
- MACRS Depreciation Methods Table
- MACRS Percentage Table Guide
- MACRS Depreciation Rate Tables
Each of these tables can be found in IRS Publication 946, Appendix B. Here are snapshots of each table:
MACRS Depreciation Methods Table
This table tells you which recovery class your asset is and which accounting method to use to calculate its depreciation.
MACRS Percentage Table Guide
The following table refers to the MACRS chart for your particular asset’s useful life or recovery period. (There are about 18 such tables by the IRS). You’ll need to know your property class and convention. You’ll find the complete list of the tables in IRS Pub 946, Appendix A.
MACRS Depreciation Rates Table
This table charts your depreciation amount each year. Simply look up the table value and multiply the value by the asset’s basis.
The final MACRS Depreciation Rates Table tells you the tax percentage you can itemize for your asset. So, say, you have a computer that falls into the 5-year category and, say, you’ve used that computer for 4 years, the table tells you that you can deduct 11.52% tax from that property.
MACRS 3- and 5-Year Depreciation Rates Table
MACRS Depreciation Calculation Example
Putting it all together, you’ll want to have 3 pieces of information handy:
- The type of property you are depreciating: Residential rental, nonresidential rental or all other property.
- The depreciation method selected from the Depreciation Methods Table
- The month or quarter the asset was placed into service.
Example 1: Calculating Tax for New Toyota
I bought a Toyota for business use for $40,000 and want to claim a tax deduction on this asset. I consult the IRS MACRS Depreciation Tables:
- The first chart (the MACRS Depreciation Methods Table) tells me my Toyota is a non-farm 3-, 5-, 7- and 10- year property and that I use the GDS 200% method to calculate how much tax to deduct.
- The second chart (the Percentage Table Guide) asks me for the convention – month or quarter – that I placed my Toyota in service. It was the Half-Year convention. I’m then referred to Depreciation Rate Table A-1 & A-2.
- This is my first year deducting tax on that vehicle, so the Depreciation Rate Table A-1 & A-2 tells me its depreciation value is 20% of the vehicle’s base rate.
Example 2: Calculating the Amount My Toyota Will Depreciate Over 6 Years
The MACRS table also tells me how much depreciation I get to take for my Toyota over, say, 6 years.
Using the 5-year column on the Depreciation Table, here’s the calculation:
Totaling the figures in the right column, I find that the total cost of MACRS depreciation for my vehicle is $40,000. This gives me my write-off for this asset.
Putting the Modified Accelerated Cost Recovery System to Use
The Modified Accelerated Cost Recovery System (MACRS) is somewhat complicated, but you’ll find that most asset accounting software programs include MACRS information for calculations. There are also free online MACRS Tax Depreciation calculators.