MACRS
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The Modified Accelerated Cost Recovery System (MACRS) is the current method of accelerated asset depreciation required by the United States income tax code. Under MACRS, all assets are divided into classes which dictate the number of years over which an asset's cost will be recovered.
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[edit] ACRS
Prior to the Accelerated Cost Recovery System (ACRS), most capital purchases were depreciated using a straight line technique, that allowed for the depreciation of the asset over its useful life. ACRS was in force from 1981-1986 in the United States, under the Economic Recovery Tax Act (ERTA) of 1981. ACRS was unique in three ways: property class lives were established, calculations were based on an estimated salvage value of zero, and shorter recovery periods were used to calculate annual depreciation. This resulted in an accelerated write off of capital costs (in comparison to that available using straight line depreciation) and was the source of the name.
Depreciation under ACRS = 2 x Straight Line Depreciation
[edit] MACRS
MACRS replaced ACRS in the United States in 1986 with the passing of the Tax Reform Act of 1986 (TRA-86), as the depreciation method condoned by the IRS and is in force today. It is exceedingly similar to ACRS save for two key features; the number of property classes was expanded, a half year convention was added to simplify the first and final years of a property's recovery life. It was meant to stimulate capital purchasing by lowering the after tax net present value by allowing for faster depreciation of capital assets. MACRS allows for more depreciation towards the beginning of the life of the capital asset (similar to double declining balance), allowing the tax deductible depreciation expense to be taken sooner, thus increasing the net present value of the capital purchase, thus allowing a company to retain more income early in the depreciation cycle. In essence, it's a more heavily "front loaded" tax benefit.
Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS.
Each system differs largely in the class lives of property, illustrated in the tables below.
[edit] MACRS Examples
For example, office equipment is depreciated with a class life of seven years, and water vessels are depreciated over ten years. Each MACRS class has a predetermined schedule, which determines the percentage of the asset's cost which is depreciated each year (see tables). Specifically, to calculate the depreciation charge for recovery tax year six of a Municipal sewage treatment plant that had an original cost of 2.2 Million:
- Look up its property class (GDS class life): 15-Year property
- Trace down the percentage table along 15-Year property to year 6: 6.23%
- Multiply the original cost by the value found in the table: 0.0623 * $2,200,000 = $137,060
The depreciation charge is $137,060.
[edit] MACRS Property Classes Table
| IRS Asset Classes | Asset Description | ADS Class Life | GDS Class Life |
| 00.11 | Office furniture, fixtures, and equipment | 10 | 7 |
| 00.12 | Information systems: computers/peripherals | 6 | 5 |
| 00.22 | Automobiles, taxis | 3 | 5 |
| 00.241 | Light general-purpose trucks | 4 | 5 |
| 00.25 | Railroad cars and locomotives | 15 | 7 |
| 00.40 | Industrial steam and electric distribution | 22 | 15 |
| 01.11 | Cotton gin assets | 10 | 7 |
| 01.21 | Cattle, breeding or dairy | 7 | 5 |
| 13.00 | Offshore drilling assets | 7.5 | 5 |
| 13.30 | Petroleum refining assets | 16 | 10 |
| 15.00 | Construction assets | 6 | 5 |
| 20.10 | Manufacture of grain and grain mill products | 17 | 10 |
| 20.20 | Manufacture of yarn, thread, and woven fabric | 11 | 7 |
| 24.10 | Cutting of timber | 6 | 5 |
| 32.20 | Manufacture of cement | 20 | 15 |
| 20.1 | Manufacture of motor vehicles | 12 | 7 |
| 48.10 | Telephone distribution plant | 24 | 15 |
| 48.2 | Radio and television broadcasting equipment | 6 | 5 |
| 49.12 | Electric utility nuclear production plant | 20 | 15 |
| 49.13 | Electric utility steam production plant | 28 | 20 |
| 49.23 | Natural gas production plant | 14 | 7 |
| 50.00 | Municipal wastewater treatment plant | 24 | 15 |
| 80.00 | Theme and amusement park assets | 12.5 | 7 |
- The deprecation deduction for automobiles is limited to $7660 (maximum) the first tax year, $4900 the second, $2950 the third year, and $1775 per year in subsequent years.
[edit] MACRS GDS Property Classes Table
| Property Class | Personal Property (all property except real-estate) |
| 3-year property | Special handling devices for food and beverage manufacture. Special tools for the manufacture of finished plastic products, fabricated metal products, and motor vehicles Property with ADR class life of 4 years or less |
| 5-year property | Information Systems; Computers / Peripherals Aircraft (of non-air-transport companies) Computers Petroleum drilling equipment Property with ADR class life of more than 4 years and less than 10 years |
| 7-year property | All other property not assigned to another class Office furniture, fixtures, and equipment Property with ADR class life of more than 10 years and less than 16 years |
| 10-year property | Assets used in petroleum refining and certain food products Vessels and water transportation equipment Property with ADR class life of 16 years or more and less than 20 years |
| 15-year property | Telephone distribution plants Municipal sewage treatment plants Property with ADR class life of 20 years or more and less than 25 years |
| 20-year property | Municipal sewers Property with ADR class life of 25 years or more |
| Property Class | Real Property (real estate) |
| 27.5-year property | Residential rental property (does not include hotels and motels) |
| 39-year property | Non-residential real property |
[edit] MACRS Applicable Percentage for Property Class
| Recovery Year | 3-Year Property | 5-Year Property | 7-Year Property | 10-Year Property | 15-Year Property | 20-Year Property |
| 1 | 33.33 | 20.00 | 14.29 | 10.00 | 5.00 | 3.750 |
| 2 | 44.45 | 32.00 | 24.49 | 18.00 | 9.50 | 7.219 |
| 3 | 14.81 * | 19.20 | 17.49 | 14.40 | 8.55 | 6.677 |
| 4 | 7.41 | 11.52 * | 12.49 | 11.52 | 7.70 | 6.177 |
| 5 | 11.52 | 8.93 * | 9.22 | 6.93 | 5.713 | |
| 6 | 5.76 | 8.92 | 7.37 | 6.23 | 5.285 | |
| 7 | 8.93 | 6.55 * | 5.90 * | 4.888 | ||
| 8 | 4.46 | 6.55 | 5.90 | 4.522 | ||
| 9 | 6.56 | 5.91 | 4.462 * | |||
| 10 | 6.55 | 5.90 | 4.461 | |||
| 11 | 3.28 | 5.91 | 4.462 | |||
| 12 | 5.90 | 4.461 | ||||
| 13 | 5.91 | 4.462 | ||||
| 14 | 5.90 | 4.461 | ||||
| 15 | 5.91 | 4.462 | ||||
| 16 | 2.95 | 4.461 | ||||
| 17 | 4.462 | |||||
| 18 | 4.461 | |||||
| 19 | 4.462 | |||||
| 20 | 4.461 | |||||
| 21 | 2.231 |
- The 3-, 5-, 7-, and 10-year classes use 200% and the 15- and 20-year classes use 150% declining balance depreciation.
- All classes convert to straight-line depreciation in the optimal year, shown with an asterisk (*).
- A half-year depreciation is allowed in the first and last recovery years.
- If more than 40% of the year's MACRS property is placed in service in the last three months, then a mid-quarter convention must be used with depreciation tables that are not shown here.
[edit] MACRS Percentage for Real Property (real estate) Table
| Recovery Year | Month 1 | Month 2 | Month 3 | Month 4 | Month 5 | Month 6 | Month 7 | Month 8 | Month 9 | Month 10 | Month 11 | Month 12 |
| 1 | 2.461 | 2.247 | 2.033 | 1.819 | 1.605 | 1.391 | 1.177 | 0.963 | 0.749 | 0.535 | 0.321 | 0.107 |
| 2-39 | 2.564 | 2.564 | 2.564 | 2.564 | 2.564 | 2.564 | 2.564 | 2.564 | 2.564 | 2.564 | 2.564 | 2.564 |
| 40 | 0.107 | 0.321 | 0.535 | 0.749 | 0.963 | 1.177 | 1.391 | 1.605 | 1.819 | 2.033 | 2.247 | 2.461 |
- The useful life is 39 years for nonresidential real property. Depreciation is straight line using the mid-month convention. Thus a property placed in service in January would be allowed 11 1/2 months depreciation for recovery Year 1.
[edit] Sources
- U.S. Department of the Treasury, Internal Revenue Service Publication 946, How to Depreciate Property. Washington, DC: U.S. Government Printing Office.
