MACRS

MACRS consists of two systems that determine how you depreciate your property. The main system is called the General Depreciation System (GDS). The second system is called the Alternative Depreciation System (ADS). You generally must use GDS to figure your depreciation unless you are specifically required by law to use ADS or you elect to use it. Property for which you are required by law to use ADS and how to elect ADS are discussed later.

The major differences between the systems are the recovery period and the method of depreciation used to figure the deduction. Generally, GDS uses the declining balance method over a shorter recovery period. ADS uses only the straight line method over a generally longer recovery period.

What Can Be Depreciated Under MACRS

MACRS applies to most tangible depreciable property placed in service after 1986. Property for which you cannot use MACRS is discussed later under What Cannot Be Depreciated Under MACRS.

Use of real property changed. You must use MACRS to depreciate all real property you acquired before 1987 that you changed from personal use to business or income-producing use after 1986.

When To Use GDS

Generally, you must use GDS for most tangible depreciable property. However, you are required to use ADS for certain property, as discussed next, and you can elect to use ADS on GDS property, as discussed later.

When To Use ADS

You must use ADS for the following property.

• All property used predominately in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect.
• Listed property used 50% or less for business. For information on listed property, see Listed Property, later.
• Any tax-exempt use property.
• Any tax-exempt bond-financed property.
• Any imported property covered by an executive order of the President of the United States.
• Any tangible property used predominately outside the United States during the year.

What Cannot Be Depreciated Under MACRS

You cannot use MACRS to depreciate the following property.

• Intangible property.
• Any motion picture film or video tape.
• Any sound recording.
• Certain real and personal property placed in service before 1987.

Election To Exclude Property From MACRS

If you properly depreciate any property under a method not based on a term of years, such as the unit-of-production method, you can elect to exclude that property from MACRS. You make the election by reporting your depreciation for the property on line 18 of Part III of Form 4562 and attaching a statement as described in the instructions for Form 4562. You must make this election by the return due date (including extensions) for the year you place your property in service. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). Attach the election to the amended return and write "FILED PURSUANT TO SECTION 301.9100-2" on the election statement. File the amended return at the same address you filed the original return.

Standard mileage rate. If you use the standard mileage rate to figure the deduction for your business automobile, you are treated as having made an election to exclude the automobile from MACRS. See Publication 463 for a discussion of the standard mileage rate.

Property Placed in Service Before 1987

There are special rules that may prevent you from using MACRS for property placed in service by anyone (for any purpose) before 1987 (before August 1, 1986, if MACRS was elected). These rules apply to both personal and real property. For more information, see chapter 3 in Publication 946.

How To Figure the Deduction Using Percentage Tables

Once you determine your property can be depreciated under MACRS and whether it falls under GDS or ADS, you are ready to figure your deduction. To help you figure your deduction, the IRS has established percentage tables. To use these percentage tables to figure your MACRS deduction each year, you need to know the following information about your property.

• Its basis.
• The date it was placed in service.
• Its property class and recovery period.
• Which convention to use.
• Which depreciation method to use.

Table 8-1

Basis

To figure your depreciation deduction, you must determine the basis of your property. To determine basis, you need to know the cost or other basis of your property. If you bought the property, your basis is the amount you paid for the property plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. Other basis (not cost) refers to basis determined by the way you received the property. For example, you may have received the property through an exchange, for services you performed, as a gift, or as an inheritance. If you received property in this or some other way, see chapter 7 to determine your basis.

Property changed from personal use. If you held property for personal use and later change it to business use or use in the production of income, your basis is the lesser of the following.

1. The fair market value (FMV) of the property on the date you change it from personal use to business use.
2. Your original cost or other basis adjusted as follows.
   1. Increased by the cost of any permanent improvements or additions and other costs that must be added to basis.
   2. Decreased by any tax deductions you claimed for casualty and theft losses and other items that reduced your basis.

Adjusted basis. After you determine your basis, you may have to make certain adjustments (increases and decreases) for events occurring between the time you acquired the property and the time you placed it in service. These events could include the following.

• Installation of utility lines.
• Legal fees for perfecting the title.
• Removal of barriers.
• Settlement of zoning issues.
• Receiving rebates.

For a discussion of items that may affect the basis of your property, see Adjusted Basis in chapter 7.

Placed in Service

For depreciation purposes, property is placed in service when it is ready and available for a specific use, whether in a trade or business, the production of income, a tax-exempt activity, or a personal activity. Even if you are not using the property, it is in service when it is ready and available for its specific use.

Example 1. A corn planter delivered to the farm ready to be used in December 2000 is placed in service in 2000 even though it will not be used until the spring of 2001.

Example 2. If the planter comes unassembled in December 2000 and is put together in February 2001, it is not placed in service until 2001.

Example 3. If the planter was delivered and assembled in February 2001 but not used until April 2001, it is placed in service in February 2001, since this is when the planter was ready for its specified use.

Fruit or nut trees and vines. If you acquire an orchard, grove, or vineyard and the trees or vines have not yet reached the income-producing stage, your depreciation begins when they reach the income-producing stage.

Immature livestock. If you acquire immature livestock for draft, dairy, or breeding purposes, your depreciation begins when they reach maturity. This means depreciation begins when the livestock reach the age when they can be worked, milked, or bred. When this occurs, your basis for depreciation is your initial cost for the immature livestock.

Property Classes and Recovery Periods

Each item of property depreciated under MACRS is assigned to a property class based on its pre-established class life. The property class establishes the number of years over which you recover the basis of your property. This period of time is called a recovery period.

Property classes. Under GDS, most tangible property falls into one of the following classes.

1. 3-year property.
2. 5-year property.
3. 7-year property.
4. 10-year property.
5. 15-year property.
6. 20-year property.
7. Residential rental property.
8. Nonresidential real property.

Recovery periods. See Table 8-1 for recovery periods under both GDS and ADS for some commonly used assets. For a complete list of class lives and recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946.

House trailers for farm laborers. Use one of the following recovery periods to depreciate a house trailer you supply as housing for those who work on your farm. Whether the house trailer is mobile or not determines which recovery period you can use.

1. If the house trailer is mobile (it has wheels and a history of movement), depreciate its cost over a 10-year recovery period under ADS or a 7-year recovery period under GDS.
2. If the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), depreciate its cost over a 25-year recovery period under ADS or a 20-year recovery period under GDS.

Water wells. Depreciable water wells used to provide water for raising poultry and livestock are land improvements and have a 15-year recovery period under GDS and a 20-year recovery period under ADS.

The types of water wells that can be depreciated were discussed earlier under Irrigation systems and water wells.

Conventions

To figure your depreciation deduction for both the year in which you place property in service and the year in which you dispose of the property, use one of the following conventions.

• The half-year convention.
• The mid-month convention.
• The mid-quarter convention.

Half-year convention. Under this convention, you treat all property placed in service or disposed of during a year as placed in service or disposed of at the midpoint of that year. This means that no matter when in the year you begin or end the use of the property, you treat it as if you began or ended its use in the middle of the year.

Generally, you use this convention for property other than nonresidential real and residential rental property.

Mid-month convention. Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. This means that regardless of when during a month you begin or end the use of the property, you treat it as if you began or ended its use in the middle of that month.

You use the mid-month convention for the following types of property.

• Nonresidential real property.
• Residential rental property.

Mid-quarter convention. Under this convention, you treat all property placed in service or disposed of during the year as placed in service or disposed of in the middle of the quarter. This means that no matter when during a quarter you begin or end the use of the property, you treat it as if you began or ended its use in the middle of the quarter.

You must use this convention when the total depreciable bases of MACRS property you placed in service during the last 3 months of the year are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. When this happens, you must use the mid-quarter convention for all MACRS property you placed in service during the year.

Depreciable basis. This is your basis in the property multiplied by the percentage of business/investment use and then reduced by the following.

• Any amortization taken on the property.
• Any section 179 deduction claimed on the property.
• Any deduction claimed for clean-fuel vehicles or for clean-fuel vehicle refueling property.

Total depreciable bases. To determine the total depreciable bases of property, do not include the following.

• Residential rental property.
• Nonresidential real property.
• Property you placed in service and disposed of in the same tax year.

Depreciation Methods

The three methods used to figure depreciation under MACRS are 150% declining balance, 200% declining balance, and straight line. Depending on the property being depreciated, all three methods can be used under GDS. Only the straight line method can be used under ADS.

Farm property. For personal property placed in service in a farming business after 1988 you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods.

• The straight line method over a GDS recovery period.
• The straight line method over an ADS recovery period.

For property placed in service before 1999, you could elect to use the 150% declining balance method using the ADS recovery periods. If you made this election, continue to use the same method and recovery period for that property.

Real property. You can depreciate real property using the straight line method under either GDS or ADS.

Depreciation table. The following table lists the types of property you can depreciate under each method. The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL.

You cannot use the 200% declining balance method for farm property placed in service after 1988.

Switching to straight line. If you use a declining balance method, you switch to the straight line method in the year it provides a greater deduction. If you use the MACRS percentage tables, discussed later under Figuring the MACRS Deduction, you do not need to determine in which year your deduction is greater using the straight line method. The tables have the switch to the straight line method built into their rates.

Fruit or nut trees and vines. Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period.

ADS required for some farmers. If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. See chapter 7 for a discussion of the application of the uniform capitalization rules to farm property.

Farming business. A farming business is any trade or business involving cultivating land or raising or harvesting any agricultural or horticultural commodity. A farming business includes any of the following.

• Operating a nursery or sod farm.
• Raising or harvesting crops.
• Raising or harvesting trees bearing fruit, nuts, or other crops.
• Raising ornamental trees. (An evergreen tree is not considered an ornamental tree if it is more than 6 years old when it is severed from its roots.)
• Raising, shearing, feeding, caring for, training, and managing animals.

Processing activities. In general, a farming business includes processing activities that are normally part of the growing, raising, or harvesting of agricultural products. However, a farming business generally does not include the processing of commodities or products beyond those activities that are normally part of the growing, raising, or harvesting of such products.

Example 1. If you are in the trade or business of growing fruits and vegetables, you can harvest, wash, inspect, and package the fruits and vegetables for sale. Such activities are normally part of the raising of these crops by farmers. You will be considered to be in the business of farming with respect to the growing of fruits and vegetables and the processing activities that are part of their harvest.

Example 2. You are in the business of growing and harvesting wheat and other grains. You also process grain you have harvested in order to produce breads, cereals, and other similar food products. You then sell these products to customers in the course of your business. Although you are in the farming business with respect to the growing and harvesting of grain, you are not in the farming business with respect to the processing of the grain to produce the food products.

Electing a different method. As shown in the Depreciation Table, you can elect a different method for depreciation for certain types of property. The election must be made by the due date of the return (including extensions) for the year you place the property in service. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of your return (excluding extensions). Attach the election to the amended return and write "FILED PURSUANT TO SECTION 301.9100-2" on the election statement. File the amended return at the same address you filed the original return. Once you make the election, you cannot change it.

If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. However, you can make the election on a property-by-property basis for residential rental and nonresidential real property.

Table 8-2

Straight line election. Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Make the election by entering "SL" in column (f) of Part II of Form 4562.

ADS election. Although your property may come under GDS, you can elect to use ADS. ADS uses the straight line method of depreciation over fixed ADS recovery periods. The ADS recovery periods for many assets used in the business of farming are listed in Table 8-1. Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946.

Make the election by completing line 16, Part II of Form 4562.

Figuring the MACRS Deduction

You can determine your MACRS depreciation deduction in one of two ways.

1. You can use the percentage tables shown in Appendix A of Publication 946.
2. You can figure your own deduction. See How To Figure the Deduction Without Using the Tables in chapter 3 of Publication 946.

Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables.

Rules for using the tables. The following rules cover the use of the percentage tables.

1. You must apply the rates in the percentage tables to your property's unadjusted basis (defined later).
2. You cannot use the percentage tables for a short tax year. See chapter 3 of Publication 946 for information on how to figure the deduction in a short tax year.
3. You must continue to use them for the entire recovery period of the property.
4. If you adjust the basis of the property for any reason other than those listed in (a) and (b), you must stop using the tables.
   1. Depreciation allowed or allowable.
   2. An addition or improvement to the property. (An addition or improvement is depreciated as a separate property.)

Figuring unadjusted basis. You must apply the table rates to your property's unadjusted basis each year of the recovery period. Unadjusted basis is the amount you would use to figure gain on a sale but figured without taking into account any depreciation taken in earlier years. However, you do reduce your original basis by any of the following items that apply.

• Amortization taken on the property.
• Section 179 deduction claimed on the property.
• Deduction claimed for clean-fuel vehicle or clean-fuel vehicle refueling property.
• Electric vehicle credit. (The lesser of $4,000 or 10% of the cost of the vehicle, even if the credit is less than that amount.)

For business property you purchase during the year, the unadjusted basis is its cost minus these adjustments.

If you trade property, your unadjusted basis in the property received is the cash paid plus the adjusted basis of the property traded minus these adjustments.

The clean-fuel vehicle and clean-fuel vehicle refueling property deductions and the credit for electric vehicles are discussed in chapter 12 of Publication 535.

Adjustment due to casualty loss. If you reduce the basis of your property because of a casualty, you cannot continue to use the tables. For the year of adjustment and the rest of the recovery period, figure the depreciation using the property's adjusted basis at the end of the year of adjustment.

Figuring MACRS using 150% DB and the half-year convention. Table 8-2 has the percentages for 3-, 5-, 7-, and 20-year property. The percentages are based on the 150% declining balance method with a change to the straight line method. This table covers only the half-year convention and the first 8 years for 20-year property. See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention.

Example 1. During the year, you buy and place in service an item of 7-year property for $10,000. You do not elect a section 179 deduction for this property. The unadjusted basis of the property is $10,000. You use the percentage tables to figure your deduction.

Since this is 7-year property, you multiply $10,000 by 10.71% to get this year's depreciation of $1,071. For next year, your depreciation will be $1,913 ($10,000 x 19.13%).

Example 2. You have a barn constructed on your farm at a cost of $20,000. You place the barn in service this year. The barn is 20-year property and you use the table percentages to figure your deduction. You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3.75% to get $750. For next year, your depreciation will be $1,443.80 ($20,000 x 7.219%).

Figuring MACRS using straight line and the half-year convention. The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. The table covers only the first 8 years for 20-year property. See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention.

Example. If in Example 2 you had elected the straight line method, you figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 2.5% to get $500. For next year, your depreciation will be $1,000 ($20,000 x 5%).

Figuring MACRS deductions without the tables. If you are required to or would prefer to figure your own depreciation without using the tables, see How To Figure the Deduction Without Using the Tables in chapter 3 of Publication 946.

MACRS Property Acquired by Exchange or Involuntary Conversion

If, after January 2, 2000, you placed in service MACRS property that was acquired in a like-kind exchange or an involuntary conversion for other MACRS property, you generally depreciate the acquired property over the remaining recovery period of the exchanged or involuntarily converted MACRS property. You must also generally continue to use the same depreciation method and convention of the exchanged or involuntarily converted property. Any excess of the basis in the acquired MACRS property over the adjusted basis in the exchanged or involuntarily converted MACRS property is depreciated as newly purchased MACRS property. However, if land or other non-depreciable property is acquired in an exchange or an involuntary conversion for depreciable property, you cannot depreciate the land or other non-depreciable property. For more information on like-kind exchanges, see chapter 10. For information on involuntary conversions, see chapter 1 in Publication 544.

If you acquired MACRS property in a like-kind exchange or in an involuntarily conversion for other MACRS property and you placed the acquired property in service before January 3, 2000, you can continue to use your present method of depreciating that property. However, if you treated the acquired property as newly purchased property, you can change your method of accounting for that property and depreciate it using the rules for property acquired and placed in service after January 2, 2000. For information on changing your method of accounting, see Change in Accounting Method in chapter 3.

Dispositions

If you dispose of depreciable property at a gain, you may have to report, as ordinary income, all or part of the gain. See chapter 11.

General Asset Accounts

To make it easier to figure MACRS depreciation, you can group separate properties into one or more general asset accounts. You can then depreciate all the properties in each account as a single item of property. Each account can include only property with similar characteristics, such as asset class and recovery period. Some property cannot be included in a general asset account. There are additional rules for passenger automobiles, disposing of property, converting property to personal use, and property that generates foreign source income.

For information on general asset accounts, see chapter 3 in Publication 946.

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