MACRS

What is Modified Accelerated Cost Recovery System (MACRS)?

Depreciation is an important aspect of business accounting that allows companies to incrementally deduct the cost of certain assets. This process more accurately reflects the asset's value and offers a clearer picture of the business' overall financial health. 

So, what is MACRS? MACRS stands for Modified Accelerated Cost Recovery System. It replaced the previous tax depreciation system in 1986, allowing for larger depreciation deductions in the first years of an asset's useful life as well as a simplified system with predefined asset classes and recovery periods.

The MACRS depreciation method uses two systems: the general depreciation system (GDS) and the alternative depreciation system (ADS). GDS is the more common method and involves a greater accelerated depreciation, which allows businesses to recover the cost of assets more quickly.

Conversely, ADS uses the straight-line depreciation method that spreads the cost of an asset equally over its useful life. By law, certain assets must use ADS for its income tax deduction. The Internal Revenue Service's Publication 946 explains which assets must use ADS, the different asset classes, and their recovery periods.

To learn more about the current depreciation system and how it works, read our guide to MACRS depreciation.

MACRS FAQs 

What assets are eligible for MACRS?

Generally, an asset is eligible for depreciation under MACRS if it meets the following criteria:

• You own the property
• You use it to generate income
• It has a determinable useful life of more than one year

However, the following assets aren't eligible:

• Property you owned and used before 1987 or during 1986
• Intangible property, such as patents, copyrights, stocks, and bonds
• Media, such as films, videotapes, and recordings
• Property you chose to exclude from MACRS

How do you calculate depreciation with MACRS?

To calculate depreciation, determine the asset's cost basis (the price you paid for it, including extra costs like installation fees), property class, recovery period, and depreciation method (GDS or ADS). Then, apply the appropriate percentage from the IRS tables in Pub. 946 to the cost basis for each year it's in service. Due to the complexity of the process, it may be best to entrust an expert to calculate the depreciation of your assets.

Is MACRS mandatory?

Generally, you must use MACRS to depreciate tangible depreciable property "placed in service" (for use in business) after 1986. However, there are exceptions. Consult Pub. 946 or a tax professional to determine the proper depreciation method for your assets. 

What is an example of MACRS depreciation?

For example, if an asset cost $50,000 and is a 5-year property that uses the half-year convention, it is depreciated at 20% the first year ($10,000), 32% in the second year ($16,000), 19.20% the third year ($9,600), and so on until the sixth year.