The modified accelerated cost recovery system (MACRS) is a depreciation method required by the IRS. MACRS is the only method allowed by the IRS for tax purposes.
MACRS is similar to the generally accepted accounting principles (GAAP) straight-line and double-declining balance depreciation methods that you may normally use for your business. However, MACRS is used for tax purposes, so you’ll need to understand how the IRS classifies business property, how MACRS is calculated, the types of depreciation methods, and when to use them.
Definition and Examples of Modified Accelerated Cost Recovery System (MACRS)
MACRS is a depreciation method that helps business owners recover tax depreciation costs on equipment and property through deductions taken over a period of time. MACRS is the only depreciation method the IRS accepts. MACRS was enacted in 1987 with the Tax Reform Act of 1986, and it’s been the main method of depreciation for taxpayers ever since. Although there are some exceptions, the MACRS method is used for most properties used for business.
- Acronym: MACRS
For example, say your business buys a $20,000 printer/copier. You want to claim depreciation on your taxes, so you use the MACRS method to calculate how many years you can claim depreciation for the machine and what percentage of the original value you can claim year by year.
MACRS is only used for IRS tax purposes. Business owners will still need to follow GAAP depreciation standards to generate financial statements.
Types of MACRS Methods
To understand how MACRS works, it helps to understand the two types of MACRS methods. The two methods are the general depreciation system (GDS) and the alternative depreciation system (ADS).
The IRS assigns the number of years business owners can deduct depreciation by the kind of property purchased, and those years vary based on whether you’re using GDS or ADS. Examples of common business property classifications include:
|Type of Property||Depreciation Period (GDS)||Depreciation Period (ADS)|
|Motor vehicles, office appliances, copiers||5 years||5 years|
|Office furniture (desks, files, safes)||7 years||10 years|
|Fruit-producing trees||10 years||20 years|
|Land improvement (shrubbery, fences)||15 years||20 years|
|Residential rental property placed in service on Jan. 1, 2018 or later||27.5 years||30 years|
Generally speaking, the main differences between GDS and ADS is that GDS allows for three types of depreciation (200% declining balance/150% declining balance/straight line) and has shorter depreciation periods, while ADS uses only the straight-line depreciation method and has longer depreciation periods.
The declining balance method allows for a greater deduction in the earlier years, while the straight-line method allows for equal deductions for the depreciation period, except for the first and last years.
Practically speaking, you’ll likely use GDS for all your business property. However, the IRS requires you to use ADS for the following types of property:
- Nonresidential real property and residential property
- A property held by an electing farming business that has a recovery period of 10 years or more in the GDS system
- Tax-exempt use and bond-financed properties
- Certain farming properties
- Certain imports from countries impacted by executive orders related to trade restrictions or discriminatory acts
Furthermore, the ADS method should be applied to properties used for business 50% or less of the time, an important tax deduction for home businesses.
IRS classifications can be tricky so it’s important to use the correct property classifications and depreciation methods to get the most accurate results.
How the Modified Accelerated Cost Recovery System Works
To accurately depreciate property using MACRS, first locate the class the business property falls into to determine the number of depreciation years allowed under GDS or ADS. For example, a printer/copier would qualify for 15 years of depreciation deductions.
You’ll then need to create a depreciation schedule. To do so, you’ll multiply the depreciation rate the IRS lists for the GDS period by the cost of the equipment being depreciated.
The maximum property depreciation you can deduct in tax year 2022 is $1.08 million.
For example, if you buy and use a printer/copier for $20,000 on January 1, you would use the five-year depreciation rate under the half-year convention (since the equipment went into service January 1 using the GDS method). Here’s a screenshot of the IRS table you’d use to crunch your numbers:
So 20% multiplied by the total cost of the copier, $20,000, gives them $4,000 of depreciation costs for the first year. Year two would be calculated the same way, but under the designated second-year percentage of 32%, making depreciation costs of $6,400 for the second year. At the end of the sixth year of copier ownership, the business owner has recovered the entire cost of the copier, $20,000, and is no longer able to deduct any more depreciation costs on this item.
|Year||Depreciation Rate||Total Depreciation|
The IRS provides a series of 24 tables you can use to calculate property depreciation. You can find the tables in Publication 946, along with in-depth instructions and examples for how and when to use them.
- The Modified Accelerated Recovery System is the standard depreciation method required by the IRS for taxes.
- The IRS has standards for how businesses classify properties and assign depreciation periods.
- There are two main categories of MACRS calculations: general depreciation system (GDS) and alternative depreciation system (ADS).
- MACRS allows business owners may depreciate assets over a GDS period using either double-declining methods or the straight-line method to calculate depreciation.
Cornell Law School Legal Information Institute. “MACRS.”