What Is MACRS Depreciation? Classes, Methods, Conventions
How the Modified Accelerated Cost Recovery System assigns a recovery period and method to every business asset
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
MACRS (the Modified Accelerated Cost Recovery System) is the depreciation system U.S. tax law requires for most business property placed in service after 1986. It assigns each asset to a class with a fixed recovery period (3 to 39 years), applies a prescribed method, and uses a convention that sets how much depreciation the first and last years receive.
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How does MACRS work?
Depreciation spreads an asset's cost over its tax life instead of deducting it all at once. Under MACRS you do not estimate useful life or salvage value — the law does that for you. Every asset falls into a class, each class has a recovery period, and the IRS publishes percentage tables so the annual deduction is a lookup rather than a calculation. The system has two sub-systems: the General Depreciation System (GDS), which almost everyone uses, and the Alternative Depreciation System (ADS), which uses longer lives and straight-line and is required in specific situations (covered in the ADS depreciation guide).
MACRS sits alongside two faster options. Section 179 lets a business expense qualifying equipment in the year of purchase up to an annual limit, and bonus depreciation lets it deduct a percentage of the cost immediately. Both are elections layered on top of MACRS: whatever cost is not expensed under section 179 or bonus is depreciated under MACRS over the asset's class life.
What are the MACRS property classes?
The class determines everything else. The common classes for a small business:
| Class | Recovery period | Typical assets | GDS method |
|---|---|---|---|
| 3-year | 3 years | Tractor units, racehorses, some tooling | 200% declining balance |
| 5-year | 5 years | Cars, light trucks, computers, office equipment, most machinery in some industries | 200% declining balance |
| 7-year | 7 years | Office furniture, most manufacturing and trade equipment, assets with no assigned class | 200% declining balance |
| 15-year | 15 years | Land improvements (fencing, paving, landscaping), qualified improvement property | 150% declining balance (QIP: straight line) |
| 27.5-year | 27.5 years | Residential rental buildings | Straight line |
| 39-year | 39 years | Nonresidential buildings (offices, shops, warehouses) | Straight line |
An asset with no specific class assignment defaults to 7-year property — the reason so much trade equipment lands there. Land itself is never depreciated.
Which method applies?
The 3-, 5-, 7-, and 10-year classes use the 200 percent declining balance method, switching to straight line when that produces a larger deduction. The 15- and 20-year classes use 150 percent declining balance, except qualified improvement property, which must use straight line. Buildings use straight line only. A taxpayer may elect straight line for any class, and must use it under ADS. Because the IRS tables build the switch in, most preparers simply read the percentage for the year from the table for the asset's class and convention.
What are the half-year and mid-quarter conventions?
The convention decides how much of the first year counts. Under the half-year convention — the default — every asset placed in service during the year is treated as placed in service at the mid-point of the year, so the first year gets a half year of depreciation regardless of the actual month. The mid-quarter convention replaces it when more than 40 percent of the year's depreciable basis (excluding buildings) is placed in service in the last three months of the year; each asset is then treated as placed in service at the mid-point of its quarter, which cuts the first-year deduction for fourth-quarter purchases sharply. Buildings always use the mid-month convention. The 40 percent test is why a business that buys most of its equipment in December plans the timing: section 179 expensing takes basis out of the test, bonus depreciation does not — though an asset fully written off under 100 percent bonus is unaffected by the convention either way.
How does MACRS interact with section 179 and bonus depreciation?
In order: first section 179 (an election, limited to the annual cap and to business income), then bonus depreciation on the remaining basis (a percentage, no income limit), then MACRS on whatever is left. A business that expenses an asset in full under section 179 or 100 percent bonus depreciation has no MACRS depreciation on it — but the asset still has a class and a recovery period, which matters for the depreciation recapture rules when it is sold and for the qualified business income deduction's property component (the UBIA guide).
Worked example
A shop buys a US$60,000 CNC machine (7-year property) in March and elects not to use section 179 or bonus depreciation. Under GDS, 200 percent declining balance, half-year convention, the IRS table gives 14.29 percent in year one (US$8,574), 24.49 percent in year two (US$14,694), 17.49 percent in year three, and so on through year eight, when the last half-year is taken. Had the same machine been bought in November and been the shop's only purchase that year, the mid-quarter convention would apply and year one would drop to 3.57 percent (US$2,142). Had the shop instead elected section 179, the whole US$60,000 would be deducted in year one, and MACRS would not apply at all.
Frequently asked questions
What is MACRS depreciation?
MACRS is the depreciation system federal tax law requires for most tangible business property placed in service after 1986. It assigns each asset a class with a fixed recovery period, a prescribed method, and a first-year convention, and the IRS publishes percentage tables for each combination.
What is the difference between GDS and ADS?
The General Depreciation System uses shorter recovery periods and accelerated methods and applies to most property. The Alternative Depreciation System uses longer recovery periods and straight-line depreciation; it is required for certain property (tax-exempt use, property used predominantly outside the United States, some farming and real estate situations) and may be elected otherwise.
How do I know the MACRS class of an asset?
Publication 946's Appendix B lists asset classes by type and by industry, with the recovery period for each. If an asset appears nowhere in the tables, it is 7-year property under GDS.
What is the half-year convention?
It treats every asset placed in service during the year as placed in service at the year's midpoint, so the first year receives half a year of depreciation. It is the default convention unless the mid-quarter test applies.
Official sources
Publication 946 states: “The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).” — Internal Revenue Service, Publication 946, How To Depreciate Property, https://www.irs.gov/publications/p946
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