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 (Modified Accelerated Cost Recovery System).  MACRS
is used to recover the basis of most business and investment
property placed in service after 1986. 

You cannot use MACRS to depreciate the following property:

Basis for MACRS 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 consists of two systems that determine how you
depreciate your property:
 

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:
 

The 200% declining balance method over a GDS recovery period.   The 150% declining balance method over a GDS recovery period.   The straight line method over a GDS recovery period.   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 deduction

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 deductions

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 may waste
depreciation deductions that could be used in later years when your
income increases.  Therefore, before deciding to use accelerated
MARCS rates, consider your income prospects.

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