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Calculate Depreciation
Using MACRS

Master the Modified Accelerated Cost Recovery System: the IRS-required method for depreciating business assets on your tax return.

CPA Regulation (REG)

What Is Depreciation?

Depreciation is the systematic allocation of an asset's cost over its useful life. Instead of expensing the full purchase price in year one, you spread the deduction across multiple tax years.

Cost Basis
The original purchase price plus costs to place the asset in service.
Recovery Period
The number of years over which you deduct the asset's cost.
Convention
A rule that determines when the asset is treated as placed in service.

Why MACRS Matters

The Modified Accelerated Cost Recovery System (MACRS) is the only depreciation method allowed by the IRS for most tangible property placed in service after 1986. It replaces the older ACRS system and is mandatory for federal tax returns.

MACRS Depreciation Curve

Deduction % Year 0% 10% 20% 30% 40% 20% Yr 1 32% Yr 2 19.2% Yr 3 11.52% Yr 4 11.52% Yr 5 5.76% Yr 6 5-Year MACRS Property (200% DB, Half-Year)

Two MACRS Systems

GDS: General Depreciation System
The default system. Uses 200% or 150% declining balance, switching to straight-line. Shorter recovery periods (3, 5, 7, 10, 15, 20, 25, 27.5, 39 years).
ADS: Alternative Depreciation System
Uses straight-line only. Longer recovery periods. Required for listed property used < 50% for business, tax-exempt property, and property used outside the U.S.

The MACRS Formula

The annual depreciation deduction under MACRS equals:

Where:

1
Cost Basis: purchase price + sales tax + delivery + installation (do not subtract salvage value)
2
MACRS %: the percentage from the IRS table for the asset's recovery period and year
3
No salvage value: under MACRS, assets are depreciated down to \( \$0 \)

Common Recovery Periods

Property Class GDS Recovery Examples
3-Year 3 years Tractor units, racehorses
5-Year 5 years Autos, computers, office equipment
7-Year 7 years Office furniture, fixtures
27.5-Year 27.5 years Residential rental property
39-Year 39 years Nonresidential real property

MACRS Conventions

Half-Year
Default for personal property. Asset treated as placed in service at the midpoint of the year, regardless of actual date.
Mid-Quarter
Required when > 40% of all personal property is placed in service in the last quarter (Q4). Each asset uses the midpoint of its quarter.
Mid-Month
Used for real property only (27.5 and 39-year). Asset treated as placed in service at the midpoint of the month.

GDS vs ADS: Key Differences

Feature GDS (Default) ADS
Method 200% or 150% DB → SL Straight-Line only
Recovery Period Shorter Longer (often class life)
Convention Half-year / Mid-quarter / Mid-month Same conventions apply
Salvage Value \( \$0 \) \( \$0 \)
Mandatory When Default for most property Listed property < 50% business use; tax-exempt use

How to Apply MACRS

1
Determine the cost basis. Add purchase price + sales tax + shipping + installation costs.
2
Identify the property class. Look up the asset type to find its GDS recovery period (3, 5, 7, 15, 27.5, 39 years, etc.).
3
Determine the applicable convention. Default is half-year. Check the 40% Q4 test for mid-quarter, or use mid-month for real property.
4
Look up the MACRS percentage from the IRS table for the correct year and recovery period.
5
Multiply: \(\text{Depreciation} = \text{Cost Basis} \times \text{Table \%}\). No salvage value subtracted.

5-Year MACRS Percentage Table

Year MACRS % On \( \$10{,}000 \) Basis
120.00%\( \$2{,}000 \)
232.00%\( \$3{,}200 \)
319.20%\( \$1{,}920 \)
411.52%\( \$1{,}152 \)
511.52%\( \$1{,}152 \)
65.76%\( \$576 \)

Example 1: Computer Equipment

A business purchases a computer for \( \$5{,}000 \) on March 15. The computer is 5-year MACRS property (half-year convention). What is the Year 1 depreciation?

1
Cost Basis: \( \$5{,}000 \)
2
Recovery Period: 5-year property
3
Year 1 MACRS %: 20.00%
4
Calculation: \( \$5{,}000 \times 0.20 = \) \( \$1{,}000 \)

Example 2: Office Furniture

A firm buys office furniture for \( \$21{,}000 \) (including delivery and setup). It is 7-year MACRS property. Calculate Year 2 depreciation.

Year 7-Year MACRS %
114.29%
224.49%
317.49%
412.49%

Example 3: Mid-Quarter Convention

A company places \( \$30{,}000 \) of 5-year equipment in service in January and \( \$80{,}000 \) in October. Is the mid-quarter convention required?

1
Total placed in service: \( \$30{,}000 + \$80{,}000 = \$110{,}000 \)
2
Q4 amount: \( \$80{,}000 \) (October is Q4)
3
Q4 percentage: \( \frac{\$80{,}000}{\$110{,}000} = 72.7\% \)
4
Result: 72.7% > 40%, so mid-quarter convention is required for all assets placed in service that year.

Real Property: Mid-Month Convention

Residential rental property (27.5-year) and nonresidential real property (39-year) use straight-line depreciation with the mid-month convention.

Common Mistakes

✕ Subtracting Salvage Value
Under MACRS, salvage value is always zero. Never reduce the cost basis by estimated residual value.
✕ Wrong Convention
Forgetting the 40% Q4 test leads to applying half-year when mid-quarter is required.
✕ Mixing GDS and ADS
Using GDS percentages when ADS is mandatory (e.g., listed property used < 50% for business).

Question 1 of 5

A taxpayer purchases a computer for \( \$8{,}000 \). It is 5-year MACRS property (half-year convention). What is the Year 1 depreciation deduction?

Question 2 of 5

Under MACRS, which of the following is always ignored when calculating depreciation?

Question 3 of 5

A company places 5-year property in service as follows: \( \$20{,}000 \) in March, \( \$10{,}000 \) in June, and \( \$25{,}000 \) in November. Which convention applies?

Question 4 of 5

A residential rental building is purchased for \( \$275{,}000 \) on July 1. Using the mid-month convention, approximately how much is the Year 1 depreciation?

Question 5 of 5

When is the Alternative Depreciation System (ADS) required instead of GDS?