The Modified Accelerated Cost Recovery System, MACRS Methods.
Beginning January 1, 1987, all tangible depreciable property purchased and used (placed in service) is expended using MACRS method(Modified Accelerated Cost Recovery System). The MACRS method is used to recover the basis of most business and investment property placed in service after 1986.
You cannot use MACRS Method to depreciate the following property:
- Property you placed in service before 1987. See IRS publication 534 for information on how to depreciate property placed in service priort to 1987.
- Certain property owned or used in 1986
- Intangible property
- Films, video tapes, and recordings
- Certain corporate or partnership property acquired in a non taxable transfer
- Property you elected to exclude from MACRS
Basis for MACRS Method Depreciation
The basis for depreciation of MACRS property is the property’s cost or other basis multiplied by the percentage of business/investment use. Reduce that amount by any credits and deductions allocable to the property.
MACRS method consists of two systems that determine how you depreciate your property:
- The General Depreciation System (GDS)
- The Alternative Depreciation System (ADS)
GDS is used to figure your depreciation deduction for property used in most rental activities, unless you elect ADS or you are specifically required by law to use ADS. GDS is popular because it has a shorter recovery period (number of years in the depreciation schedule). This allows for greater deductions on your income tax. However, if you want to show a greater net worth, ADS shows a higher value for the property.
MACRS provides three depreciation methods under GDS and one depreciation method under ADS:
- 1. The 200% declining balance method over a GDS recovery period.
- 2. The 150% declining balance method over a GDS recovery period.
- 3. The straight line method over a GDS recovery period.
- 4. The straight line method over an ADS recovery period.
The table below explains the benefits of each method:
|Method||Type of Property||Benefit|
|GDS using 200% DB||3-, 5-, 7-, and 10-year||Provides a greater deduction during the
earlier recovery years
Changes to straight-line (SL) when that method provides an equal or greater deduction
|GDS using 150% DB||3-, 5-, 7-, and 10-year. All 15- and 20-year||Provides a greater deduction during the
earlier recovery years
Changes to straight-line (SL) when that method provides
an equal or greater
|GDS using SL||All 3-, 5-, 7-, 10-, 15-, and 20-year property.|
Nonresidential real property
Residential rental property
|Provides for equal yearly deductions (except for the first and last years)|
|ADS using SL||Listed property used 50% or less for business|
Any property for which you elect to use this method
|Provides for equal yearly
IRS publication 946, “How to Depreciate Property”, has an in-depth overview of each of the depreciation methods described above as well as tables for each method.
With GDS, personal property is depreciated using the declining-balance method (double or 150%, depending on the recovery class) switching to straight line when the method results in the larger deduction. Residential property is depreciated using the straight-line method over 27.5 years, and nonresidential real property is depreciated using the straight-line method over 39 years (31.5 years for property placed in service before May 13, 1993).
Accelerated rates of MACRS give you an opportunity to advance the time of taking your deduction. It may be advantageous for you to use this because the higher deductions in the first few years will provide you with cash for working capital or for investments in other income producing sources. By accelerating the deductions you defer the payment of taxes that would be due if you claimed smaller depreciation deductions using more conservative straight line methods. The tax deferral lasts until the rapid method provides lower depreciation deductions than would the more conservative method.
If you are starting a new business in which you expect losses or low income at the start, accelerated MACRS method may waste depreciation deductions that could be used in later years when your income increases. Therefore, before deciding to use accelerated MARCS method rates, consider your income prospects.