MACRS depreciation definition
/What is MACRS Depreciation?
MACRS depreciation is the tax depreciation system used in the United States. MACRS is an acronym for Modified Accelerated Cost Recovery System. Under MACRS, fixed assets are assigned to a specific asset class, which has a designated depreciation period associated with it. The Internal Revenue Service has published a complete set of depreciation tables for each of these classes. The classes are noted in the following table.
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Class |
Depreciation Period |
Description |
| 3-year property | 3 years | Tractor units for over-the-road use, race horses over 2 years old when placed in service, any other horse over 12 years old when placed in service, qualified rent-to-own property |
| 5-year property | 5 years | Automobiles, taxis, buses, trucks, computers and peripheral equipment, office equipment, any property used in research and experimentation, breeding cattle and dairy cattle, appliances & etc. used in residential rental real estate activity, certain green energy property |
| 7-year property | 7 years | Office furniture and fixtures, agricultural machinery and equipment, any property not designated as being in another class, natural gas gathering lines |
| 10-year property | 10 years | Vessels, barges, tugs, single-purpose agricultural or horticultural structures, trees/vines bearing fruits or nuts, qualified small electric meter and smart electric grid systems |
| 15-year property | 15 years | Certain land improvements (such as shrubbery, fences, roads, sidewalks and bridges), retail motor fuels outlets, municipal wastewater treatment plants, clearing and grading land improvements for gas utility property, electric transmission property, natural gas distribution lines |
| 20-year property | 20 years | Farm buildings (other than those noted under 10-year property), municipal sewers not categorized as 25-year property, the initial clearing and grading of land for electric utility transmission and distribution plants |
| 25-year property | 25 years | Property that is an integral part of the water distribution facilities, municipal sewers |
| Residential rental property |
27.5 years | Any building or structure where 80% or more of its gross rental income is from dwelling units |
| Nonresidential real property |
39 years | An office building, store, or warehouse that is not residential property or has a class life of less than 27.5 years |
A business determines its tax depreciation based on the information in the preceding table for assets ready and available for use since 1986. The resulting depreciation is included in the company's income tax return as part of the derivation of taxable income.
Advantages of MACRS Depreciation
The MACRS system was designed to accelerate the recognition of depreciation expense for tax purposes. Doing so allows businesses to recognize less taxable income in the short term, thereby encouraging them to invest in additional capital assets.
Disadvantages of MACRS Depreciation
There are several disadvantages associated with using the MACRS depreciation system, which are as follows:
Differs from book depreciation. This depreciation is not used in the entity's financial statements, which instead likely uses depreciation that is based on either straight-line or some form of accelerated depreciation calculations. This can result in differences between the tax basis and book basis of an organization's fixed assets.
No calculation flexibility. The MACRS system mandates the use of highly specific depreciation periods. This means that a business has no flexibility at all in aligning its reported depreciation with the actual usage patterns of its assets.
Larger tax burden in later years. Because the MACRS system accelerates expense recognition, it leaves much less depreciation expense available for use in later years. This will result in increased taxable income in later years, which could result in unsupportable tax liabilities in those periods.