What is a 'Modified Accelerated Cost Recovery System - MACRS'

The modified accelerated cost recovery system (MACRS) is a depreciation system which allows the capitalized cost basis of assets to be recovered over a specified life of the asset by annual deductions for value depreciation. MACRS is the depreciation system used in the United States, and was created after the release of the Tax Reform Act of 1986.

BREAKING DOWN 'Modified Accelerated Cost Recovery System - MACRS'

As defined by the Internal Revenue Service (IRS), depreciation is an income tax deduction that allows a business to recover the cost basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property. Most tangible assets are depreciable. Likewise, certain intangible assets, such as patents and copyrights, are depreciable. The modified accelerated cost recovery system (MACRS) is the proper depreciation method for most assets. MACRS allows for greater accelerated depreciation over longer time periods. This is beneficial since faster acceleration allows individuals and businesses to deduct greater amounts during the first few years of an asset's life, and relatively less later. Depreciation using MACRS can be applied to assets such as computer equipment, office furniture, automobiles, fences, farm buildings, racehorses, etc.

The IRS publishes the lives of various classes of assets. This information is used to compute the depreciation for a given type of qualified asset. Few examples of some assets and their useful lives in years as published by the IRS include:

Table of Property Types and Class Lives

Description of Assets

Useful Life (Years)

Tractors, racehorses, rent-to-own property, etc.

3

Automobiles, buses, trucks, computers, office machinery, breeding cattle, furniture, etc.

5

Office furniture, fixtures, agricultural machinery, railroad track, etc.

7

Vessels, tugs, agricultural structure, tree or vine bearing fruits or nuts, etc.

10

Municipal waste water treatment plant, restaurant property, natural gas distribution line, land improvements, such as shrubbery, fences, and sidewalks, etc.

15

Farm buildings, certain municipal sewers, etc.

20

Water utility property, certain municipal sewers, etc.

25

Any building or structure where 80% or more of its gross rental income is from dwelling units

27.5

An office building, store, or warehouse that is not residential property or has a class life of less than 27.5 years

39

 

Refer to IRS Publication 946 – How to Depreciate Property for a full breakdown of asset classes and their useful lives. Since the tax rules for MACRS are complex, the 100-plus pages of the IRS Publication 946 provides complete guidance on depreciating assets with MACRS.

Based on the information provided in the table, business can determine its tax depreciation for assets. The basis for depreciation of MACRS property is the property's cost basis multiplied by the percentage of business/investment use. The amount derived is recognized in the company’s income tax return and used to determine taxable income by factoring in any tax credits and deductions that can be claimed on the property. Note that the derived tax depreciation is not recorded in the financial statements, as these statements calculate depreciation using the straight-line depreciation method or some other form of accelerated cost depreciation method.

RELATED TERMS
  1. Recovery Property

    Recovery Property was a term used when the Accelerated Cost Recovery ...
  2. Unadjusted Basis

    A basis used for depreciation purposes. Unadjusted basis uses ...
  3. Unit of Production Method

    The unit of production method calculates depreciation when the ...
  4. Accelerated Option

    This term refers to an option in an insurance contract, usually ...
  5. Accelerated Payments

    Accelerated payments is a term generally associated with making ...
  6. Accelerated Death Benefit (ADB)

    An accelerated death benefit (ADB) allows a life insurance policyholder ...
Related Articles
  1. Investing

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  2. Trading

    The 6 Signs Of An Economic Recovery

    For all the talk of whether the economy is recovering or sinking, what should a recovery actually look like?
  3. Insights

    The American Recovery Act: 8 Years Later

    Eight years ago today, Obama signed the $787 billion stimulus package in the midst of the Great Recession. How has the economy performed since?
  4. Investing

    Charles Schwab to Enhance Technology Via New Digital Accelerator Hub

    Charles Schwab is looking to speed up development and deployment of digital technologies by expanding its Digital Accelerator program.
  5. Trading

    Trading Systems: Run With The Herd Or Be A Lone Wolf?

    Find out if taking the path less traveled will work in your favor - or against it.
  6. Investing

    Buy Stocks, Sell Bonds: The Economy Is Accelerating

    Since Election Day, investors have ridden a historic wave of optimism, but it's supported by cold economic data.
  7. Investing

    Understand the security types of corporate bonds

    Any investor should be aware of the different security types regarding corporate bonds as well as the direct correlation to potential recovery rates.
  8. Taxes

    Recoverable Depreciation: How it Works

    Recoverable depreciation is a concept used in many insurance policies and claims.
  9. Insights

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  10. Taxes

    5 Key Tax Law Changes Impacting Businesses

    The Tax Cuts and Jobs Act impacts businesses in a number of ways.
RELATED FAQS
  1. What are the different ways to calculate depreciation?

    Read about some of the different allowable methods of calculating depreciation expenses as allowed by generally accepted ... Read Answer >>
  2. What is the difference between amortization and depreciation?

    Learn the difference between amortization, depreciation, and depletion and how companies use these accounting methods to ... Read Answer >>
  3. What are some examples of the main types of capital expenditures (CAPEX)?

    Learn about different expenses with acquiring assets that are considered capital expenditures and should be depreciated over ... Read Answer >>
  4. How does accumulated depreciation affect net income?

    Learn why accumulated depreciation does not directly affect a company's net income; understand where a company accounts for ... Read Answer >>
  5. When do you use installment sales method vs. the cost recovery method?

    Take a deeper look at the installment sales method and the cost recovery method of recognizing business sales revenue and ... Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center