The Modified Accelerated Cost Recovery System (MACRS) is a method of depreciation in the United States, enacted in the Tax Reform Act of 1986. It allows businesses to recover the cost of certain assets over a specified life span, typically leading to larger depreciation expenses in the earlier years of an asset’s life.
Types of MACRS Depreciation
There are two main categories under MACRS for depreciating property:
General Depreciation System (GDS)
GDS is the most commonly used method and applies to most asset types. Under GDS, assets are depreciated over recovery periods defined by the IRS, using specific methods such as the Double Declining Balance (DDB) or 200% declining balance method, then switching to the straight-line method when it maximizes the deduction.
Alternative Depreciation System (ADS)
ADS is used for property that is used predominantly outside the United States, for tax-exempt use property, and for certain other assets. The recovery periods are generally longer, and the depreciation is calculated using the straight-line method.
Special Considerations
Placed-in-Service Date
The date when the property was placed in service determines the start of the depreciation calculation. For instance, an asset put into service on June 15 will be subject to a half-year convention under GDS, meaning only half a year’s depreciation is allowed for the first year.
Bonus Depreciation
Businesses are allowed an additional first-year depreciation deduction for eligible property in the year it is placed in service. Known as Bonus Depreciation, this provision has varied in availability and amount over time but was significantly utilized during the years following the Tax Cuts and Jobs Act of 2017.
Examples of MACRS Application
Consider a business that purchases machinery for $10,000 with a recovery period of 5 years under GDS:
- First Year: Using the DDB method, the depreciation expense is $4,000 (40% of $10,000).
- Subsequent Years: The following year, the expense would be 40% of the remaining $6,000, altering upon switching to the straight-line method when it’s advantageous.
Historical Context
MACRS replaced the Accelerated Cost Recovery System (ACRS) for property placed in service after 1986. ACRS itself was implemented in 1981, and both systems were designed to simplify depreciation rules and incentivize investment in business assets.
Applicability
MACRS is used predominantly in the United States for business tax filing. The system is mandated for tangible property, encouraging capital investments by allowing faster recovery of costs.
Related Terms
- Depreciation: The allocation of the cost of a tangible asset over its useful life.
- Section 179 Deduction: An immediate expense deduction for qualified assets in the year they are purchased.
- Half-Year Convention: An IRS rule that assumes property is in service for half of the year, allowing a half-year’s depreciation in the first and last years.
FAQs
Q: What assets qualify for MACRS? A1: Tangible, depreciable property such as machinery, buildings, vehicles, and computers qualify for MACRS.
Q: Can intangible assets be depreciated under MACRS? A2: No, intangible assets like patents and goodwill are not depreciated under MACRS. They are amortized over their useful life.
Q: How does Bonus Depreciation interact with MACRS? A3: Bonus Depreciation allows for an additional deduction in the first year, after which the remaining cost is depreciated under MACRS rules.
References
- Internal Revenue Service. “Publication 946: How To Depreciate Property.” IRS.gov.
- “Tax Cuts and Jobs Act of 2017.” Public Law No: 115-97.
Summary
MACRS is a critical component of U.S. tax code, enabling accelerated depreciation of business assets. Understanding its rules and application can significantly impact tax planning and financial strategy, helping businesses maximize their deductions in the early years of asset ownership.
