What Does Modified Accelerated Cost Recovery System (MACRS) Mean?

The modified accelerated cost recovery system (MACRS) is a depreciation system used for tax purposes in the U.S. MACRS depreciation allows the capitalized cost of an asset to be recovered over a specified period via annual deductions. The MACRS system puts fixed assets into classes that have set depreciation periods.  

Key Takeaways

  • The modified accelerated cost recovery system (MACRS) allows a business to recover the cost basis of certain assets that deteriorate over time.
  • The IRS provides guidelines on which assets are eligible for MACRS and what useful life figure should be used.
  • MACRS allows for faster depreciation in the first years of an asset's life and slows depreciation later on. This is beneficial to businesses from a tax perspective.

Understanding the 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, and so on.

Example of MACRS

The IRS publishes the useful 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:

Assets and Useful Life in Years
 

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

The information in this table is sourced from the IRS

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 provide complete guidance on depreciating assets with MACRS.

Based on the information provided in the table, a 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.