MACRS Depreciation Tables & How to Calculate

Cody Cromwell
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How MACRS Depreciation Works

The MACRS depreciation method is a fairly straightforward one. Basically, you pick 3 rates – 12% for the starting period, 18% for the middle period, and 22% for the final period. Your asset will be depreciated for its cost, plus the cost of the applicable MACRS method. The depreciation rate you choose will be averaged over the life of the asset – not just one year.

The starting point for the depreciation calculation is the asset’s original cost, but you can elect to start your calculation at a different point. Likewise, you can elect to stop the MACRS calculation at any point, or to start a new calculation at a different point.

The structure of the MACRS table is pretty simple. It’s a three-step table, where each step is multiplied by a different rate. There’s a big jump between each step – in other words, to go from the 12% rate to the 18% rate, you’ll need to multiply the 12% rate by two. At the end, you’re left with the final rate; that’s what you use in your calculation.

Depreciation Calculator: How To Calculate MACRS Depreciation

MACRS is a method of depreciating capital assets used by taxpayers for depreciation. It was created by the IRS in 1954, and it’s the most widely used method of depreciation. MACRS was updated in 1977 to provide for straight line depreciation.

As you can imagine, a lot of changes were implemented to the MACRS tables when they were updated, and a lot of people get confused about how to calculate depreciation under the current MACRS system. Sometimes it can be difficult to find resources that break down the calculations in straightforward and easy to understand terms.

This article is designed to be a one-stop guide for all of your MACRS depreciation needs. We’ll cover both straight line depreciation under current MACRS depreciation tables, and the improved methods of depreciation under the new –modified accelerated cost recovery system.”

For anyone who’s been curious about how MACRS is calculated, how it works, how it’s used, and how to calculate depreciation for their business, this guide will be a complete treasure trove of information.

Depreciation System

Modified Accelerated Cost Recovery System (MACRS)

The Modified Accelerated Cost Recovery System (MACRS) is a set of rules that dictate how depreciation is applied to a business asset. MACRS calculates depreciation over a period of years and generally over a five-year period. The different stages of MACRS help determine the different methods of depreciation used. MACRS changes the way that the IRS previously used straight line depreciation, which was used for nearly all assets and a faster way of depreciating an asset.

The Modified Accelerated Cost Recovery System is broken down into four different stages: Recovery Period One, Recovery Period Two, Recovery Period Three and Recovery Period Four. These four stages are the stages in which the asset is depreciated, and each of the stages is made up of a depreciation period.

For example, an asset is first purchased. The asset is then placed into service. After the asset is placed into service, it will go through a depreciation period. Once the asset has completed its depreciation period, it will be placed into another service in which it will continue to be depreciated. Once the asset has been completely depreciated, it will once again be placed into service and a new set of depreciation rules are followed.

Property Classifications

MACRS stands for Modified Accelerated Cost Recovery System, and it’s a depreciation method that follows different rules for different property types.

Depreciation Tax Rates

MACRS is also broken down into three different levels, these are:

  • First-in First-out, or FOF
  • BAS
  • General Plant, or GAS

Here are a few examples to better show the difference in depreciation method.

BAS

Depreciable Assets: Stationary equipment and machinery for which the useful life is at least three years and the depreciation is based on a straight line.

History: Original MACRS depreciation system, introduced in 1986.

Limited to real estate, depreciable assets, consumable supplies, and business equipment.

MACRS Used with This Program

First-in First Out, or FOF.

Depreciable Assets: Stationary equipment and machinery for which the useful life is at least three years and the depreciation is based on a straight line.

History: Modified version of the original MACRS Available for real estate, depreciable assets, and tangible personal property.

Macrorecollision Act of 2009

This Act was passed on December 9, 2009, and set minimum suspension lengths b MACRS.

First-in First-out, or FOF.

Cost Basis of the Asset

Convention

Ally, MACRS depreciation tables have been used to calculate depreciation deductions for property placed in service based on generally recognized accounting principles.

These tables are contained in Internal Revenue Service (IRS) Publication 946.

Preparing your own depreciation tables is not that hard if you know the precise rates to use, but to make sure you’re using the correct rate and method, it’s always better to use a professional to do the job.

The most important part of comparing the theoretical and actual depreciation rates is understanding depreciation rates defined in the Internal Revenue Code.

In the US, Internal Revenue Code Section 1201 mandates that each year the IRS publishes new MACRS depreciation tables.

The IRS also issues a publication, Internal Revenue Code Section 175, which contains Computational Guidelines to demonstrate that the published rates and tables will result in depreciation that ‘matches’ actual economic costs in the trade or business being conducted. That is, the published depreciation rates and tables are intended to produce actual depreciation expense that is not excessive, but rather in accordance with the economic cost principles of the Internal Revenue Code. This publication is available for free and can be retrieved from the IRS web site.

Depreciation Method

MACRS – Modified Accelerated Cost Recovery System

The Modified Accelerated Cost Recovery System (MACRS) is a method for depreciating business assets for tax purposes. While Depreciation is a process for accelerating the usage of an asset with the benefit of tax deduction, using the MACRS method allows you to deduct your asset up front and therefore helps to reduce your tax liability. MACRS depreciation tables are employed when a taxpayer purchases assets which can be depreciated based on the IRS's guidelines. Examples of MACRS methods include straight-line, declining balance and others

MACRS Discount Rate: The discount rate used for the calculation is a percentage rate. The method used to find the discount rate depends on the type of asset being considered. For assets with a considerable life, the discount rate generally changes over time. If you want to choose the highest discount rate from the IRS tables, then you can consider opting for the "straight line" method, which will be used if you choose to use the "declining balance" method.

Below are some of the tables the IRS uses in its depreciation process and the process of calculating MACRS rates.

Putting it All Together

There are four types of MACRS depreciation tables available for taxpayers. Which one you use depends on the classification period you give to the assets. Each of these correlation tables applies whether the asset is a building or an improvement to an existing building, or whether the property is used for business or personal use.

In order to determine which depreciation schedule to use, you must determine the length of your property’s useful life and how you will use the building. This lengthens the useful life, and determines which depreciation schedule you will use.

I am going to show you an example of using the MACRS Depreciation Tables with the help of a Free Online Tax Filing Download.

How to Report MACRS Depreciation for Tax Purposes

The calculation of Modified Accelerated Cost Recovery System (MACRS) Depreciation Schedules for tax purposes differs from the annual depreciation for accounting purposes. When calculating depreciation for tax purposes, you first need to choose the Modified Accelerated Cost Recovery System (MACRS) depreciation method. This is followed by selecting one of the four depreciation tables.

The difference between choosing the MACRS depreciation method and the depreciation method chosen for accounting purposes is that the former doesn’t take into account wear and tear. However, MACRS depreciation does recognize property improvement and loan forgiveness by recognizing the net business expenses on which a business entity can claim deductions for.

By default, MACRS depreciation is selected for non-corporate business entities. On the other hand, and corporate entity is required to select each depreciation method that they have utilized, i.e. regular depreciation, or MACRS depreciation, each of them for the tax years chosen. If more than one depreciation method is used, you need to list the depreciation method each year for the tax years in question.

The benefit of choosing MACRS depreciation for tax purposes is that depreciation taken on different assets over a period of 48 months or less is spread more evenly. Moreover, a corporate entity is allowed to elect for 100% expensing or 100% cost recovery under MACRS, rather than deducting a portion of it.

What Records Should I Keep for Tax Purposes?

One of the most important things that you need to know for the current year and the entire 10 year depreciation, MACRS is 10-year, not straight line depreciation. Technically, you can use straight line with the straight line method in all years of the life of the asset. This may seem like it would be better, but you have to consider that the fair market value of an asset today would probably be somewhat different than its fair market value over the 10 years. So over a 10 year period, you would have seen the depreciation spread out over the years as opposed to the same amount over an entire year. So you get slight benefits in some years and slight disadvantages in other years. Nowadays I like to use the straight line method for all asset class depreciation unless I am required to use another method.

The Bottom Line

Briefly, it is the Internal Revenue Code section 168(k) and MACRS is a part of it. A deduction is based on the decline of value of a property.

When a property is taken out of service or retirement, depreciation is allowed. The purpose of depreciation is to recover the cost of the purchase and allow for the investment to generate a profit.

Depreciation is the basis of all the different taxes we pay. When we do any major renovations or remodeling, it is often attributed to the depreciation of the property.

Depreciation is used to help the IRS with taxing property. The IRS looks to the value of the property and then uses the same percentage of the property value to set the taxes.

MACRS means Modified Accelerated Cost Recovery System. This is the system that is used to figure depreciation.

Section 167 allows depreciation to be calculated using certain rules.

Section 168 is called the Recovery Act of 1965 and the title of all the changes to the Internal Revenue Code that benefit businesses.

Section 168 k is Federal Business Tax and allows for depreciability over 28% recovery period.

MACRS (Modified Accelerated Cost Recovery System) is a set of rules that are designed to current business and mortgage practices.

Section 168 is a depreciation method to calculate the depreciation amount. It has two parts: