MACRS Depreciation: What It Is and How to Calculate It (2025)

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H1

MACRS Depreciation: What It Is and How to Calculate It

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ANSWER SECTION

MACRS (Modified Accelerated Cost Recovery System) is the depreciation method required by the IRS for most business assets placed in service after 1986. It allows businesses to recover the cost of tangible property over a specified recovery period through annual depreciation deductions. MACRS uses predetermined recovery periods ranging from 3 to 39 years depending on the asset type, with faster write-offs in early years through declining balance switching to straight-line.

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H2: MACRS Property Classes and Recovery Periods

Different assets fall into different recovery period categories:

Property Class	Recovery Period	Common Assets
3-Year	3 years	Race horses, special tools
5-Year	5 years	Vehicles, computers, office equipment, appliances
7-Year	7 years	Office furniture, fixtures, agricultural equipment
10-Year	10 years	Vessels, trees/vines bearing fruit
15-Year	15 years	Land improvements, QIP, sidewalks, fencing
20-Year	20 years	Farm buildings, municipal sewers
27.5-Year	27.5 years	Residential rental property
39-Year	39 years	Nonresidential real property

Most Common for Small Businesses:

• 5-year: Computers, software, vehicles, machinery
• 7-year: Furniture, fixtures, equipment
• 15-year: Qualified Improvement Property (QIP)

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H2: MACRS Depreciation Methods

MACRS uses two primary calculation methods:

1. General Depreciation System (GDS):

• Uses 200% declining balance (double-declining)
• Switches to straight-line when advantageous
• Most commonly used method

2. Alternative Depreciation System (ADS):

• Uses straight-line method
• Longer recovery periods
• Required for certain property types
• Mandatory for farming business property

Method Comparison (5-year property, $10,000 cost):

Year	GDS (200% DB)	ADS (Straight-Line)
1	$2,000 (20%)	$1,000 (10%)
2	$3,200 (32%)	$2,000 (20%)
3	$1,920 (19.2%)	$2,000 (20%)
4	$1,152 (11.52%)	$2,000 (20%)
5	$1,152 (11.52%)	$2,000 (20%)
6	$576 (5.76%)	$1,000 (10%)

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H2: Section 179 and Bonus Depreciation

MACRS works alongside two important deductions:

Section 179 Expensing:

• 2025 limit: $1,250,000
• Phase-out threshold: $3,130,000
• Deduct full cost immediately instead of depreciating
• Available for most tangible personal property

Bonus Depreciation (2025):

• 40% of qualified property cost
• Phasing down from 100% (2022) to 0% (2027)
• Applies to new and used property
• Taken after Section 179, before regular MACRS

Example Calculation: Business purchases $100,000 of 5-year equipment:

1. Section 179: Deduct $100,000 (up to limit)
2. If Section 179 limit reached: Take 40% bonus = $40,000
3. Apply MACRS to remaining $60,000 over 5 years

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H2: How to Calculate MACRS Depreciation

Step-by-Step Calculation:

1. Determine asset basis:

   • Purchase price + sales tax + installation + freight
   • Subtract any salvage value (not used in MACRS)

2. Identify property class:

   • Use IRS Publication 946 tables
   • Common sense rules apply

3. Apply convention:

   • Half-year convention: Most personal property
   • Mid-quarter convention: If >40% placed in service in Q4
   • Mid-month convention: Real property

4. Use IRS percentage tables:

   • Publication 946 Appendix A
   • Or calculate using formulas

Formula for 200% Declining Balance:

Year 1: Basis × (2/Recovery Period) × Convention Factor
Subsequent years: (Basis - Accumulated Depreciation) × (2/Recovery Period)

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H2: Related Tax Questions

Learn about Qualified Improvement Property in our guide on QIP with the 15-year MACRS rules and Section 179 eligibility.

For information on unreimbursed employee business expenses and depreciation, see our guide on unreimbursed employee expenses with the current limitations.

To find your IRS business classification code for depreciation schedules, see our guide on principal business code lookup with NAICS code tables.

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