MACRS

How MACRS works

Each asset is assigned to a property class based on its type and expected useful life, as defined in IRS Publication 946. The class determines the recovery period: the number of years over which the cost is deducted.

MACRS uses two primary depreciation methods:

• General Depreciation System (GDS): The default method, using declining balance depreciation (200% or 150%) that switches to straight-line when that yields a larger deduction. Applies to most business property.
• Alternative Depreciation System (ADS): A slower, straight-line method required for certain property, including assets used predominantly outside the U.S., listed property used 50% or less for business, and property used in tax-exempt activities.

The most common recovery periods are 3, 5, 7, 10, 15, 20, 27.5 (residential rental), and 39 years (nonresidential real property). The half-year convention applies in most cases, treating assets as placed in service at the midpoint of the tax year regardless of actual purchase date.

Why MACRS matters

MACRS front-loads depreciation deductions, producing larger deductions in the early years of an asset's life. This reduces taxable income sooner and improves near-term cash flow.

MACRS also interacts with Section 179 expensing and bonus depreciation, which may allow businesses to deduct some or all of an asset's cost in the year it is placed in service.

Key limitations

• Tangible property only. Intangible assets such as patents and goodwill are amortized under Section 197, not depreciated under MACRS.
• Land cannot be depreciated. When purchasing real property, the land value must be separated from the building value before calculating MACRS deductions.
• Depreciation recapture. If an asset is sold at a gain after MACRS deductions are taken, Sections 1245 or 1250 may convert some of that gain from capital gain to ordinary income.
• State tax conformity varies. Some states do not conform to federal bonus depreciation or Section 179 rules, requiring separate state calculations.
• Separate from book depreciation. MACRS is a tax method. Businesses often use straight-line depreciation for financial reporting, creating a temporary difference between book income and taxable income.

Related terms

• Capital accounting: The broader framework for tracking long-term assets and their costs, within which MACRS depreciation operates.
• What is an operating agreement for an LLC: An LLC's operating agreement may address how asset purchases are handled, which affects depreciation planning.
• What is direct ownership in business: Asset ownership structure determines which entity claims MACRS deductions and how they flow through to individual tax returns.

FAQs about MACRS

Does MACRS factor in salvage value?

No. MACRS ignores salvage value and depreciates the full cost basis of an asset down to zero over the recovery period.

Why does a 5-year asset generate deductions over six tax years?

The half-year convention allows only a half-year's depreciation in both the first and last year of the recovery period, so a 5-year asset generates deductions across six tax returns.

How is MACRS reported on a federal tax return?

MACRS depreciation is reported on Form 4562, Depreciation and Amortization, filed with the business's federal return each year an asset is being depreciated. The total deduction flows to the appropriate schedule, such as Schedule C or Form 1120, where it reduces taxable income.

Can a business choose which property class to assign an asset to?

No. Property class assignments are determined by IRS asset class definitions and recovery period rules in Publication 946.