Depreciation And Cost-Recovery Concepts - Modified Accelerated Cost Recovery System

Modified Accelerated Cost Recovery System
The modified accelerated cost recovery system (MACRS) is a depreciation method that applies to assets placed in service after 1986. This depreciation system allows the cost basis of certain tangible property to be recovered over the specified life of the asset by a depreciation deduction each year until exhausted.

Why should the property owner take the depreciation?
The property owner does not have to take the depreciation allowed. However, the cost basis is still reduced by the allowable depreciation even if the owner doesn't take the depreciation deduction.

**MUST KNOW**- Property Classes

  • Three-Year Property Racehorses, special tools, breeding hogs (Asset life: Four years or less)
  • Five-Year Property Computers light duty trucks, autos (Asset life: Four years +, but less than 10 years)
  • Seven-Year Property Office furniture, fixtures (Asset life: 10 years +, less than 16)
  • 10-Year Property Vessels, barges, tugs, water transportation equipment (Asset life: 16 years +, less than 20)
  • 15-Year Property Fences, bridges, sidewalks, roads, shrubbery (Asset life: 20 years+, less than 25)
  • 20-Year Property Farm buildings, municipal sewers (Asset life: 25 years+)

Straight-Line Recovery

  • 27.5-Year Property Residential real property
  • 39-Year Property Non-residential real property

Percentages are based on:

  • 200% declining balance for 10-year and less property
  • 150% declining balance for 15 and 20-year property

"Half-Year Convention"- In the year of acquisition and year of disposition, half-year depreciation is allowed in both scenarios.

"Mid-Quarter Convention"- If more than 40% of the property is placed in service in the last quarter of the year, then mid-quarter convention applies:

First quarter acquisition = 10.5 months allowable depreciation

Second quarter acquisition = seven and a half months allowable depreciation

Third quarter acquisition = four and a half months allowable depreciation

Fourth quarter acquisition = one and a half months allowable depreciation

Expensing Policy
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