MACRS Defined

Words you may need to know (see Glossary):

• Basis
• Class lives
• Convention
• Declining balance method
• Disposed
• Nonresidential real property
• Placed in service
• Property class
• Recovery period
• Residential rental property
• Straight line method

MACRS consists of two systems that determine how you depreciate your property. The main system is called the General Depreciation System (GDS) and the second system is called the Alternative Depreciation System (ADS). You generally must use GDS to figure your depreciation deduction 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 under What Can Be Depreciated Under MACRS.

Major differences between the systems. 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.

Recovery period. The recovery period is the number of years over which you recover the cost of the property. Under GDS, most property is assigned to one of eight property classes. These property classes are based on pre-established class lives and they provide the recovery period. Under ADS, the recovery period generally is the same as the class life of the property. Property classes and recovery periods are discussed in detail later under Property Classes and Recovery Periods. Recovery periods for GDS and ADS for most property can be found in Appendix B, Table of Class Lives and Recovery Periods.

Conventions. Both systems simplify the way you figure your deduction by providing three preset conventions. These conventions determine the number of months for which you claim depreciation in the year you place property in service and in the year you dispose of the property. The conventions are as follows.

• Mid-month convention -- Use this convention for all nonresidential real property and residential rental property.
• Mid-quarter convention -- Use this convention if the basis of property placed in service during the last three months of the tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total bases of all property placed in service for the entire year.
• Half-year convention -- Use this convention for all other property.

For more information on these conventions, see Conventions later under How To Figure the Deduction Using Percentage Tables.

Methods. MACRS provides three methods under GDS and one method under ADS of figuring depreciation on property.

• The 200% declining balance method over a GDS recovery period.
• The 150% declining balance method over a GDS recovery period.
• The straight line method over a GDS recovery period.
• The straight line method over an ADS recovery period.

You can elect to use ADS for property that qualifies for GDS.

These depreciation methods are discussed later under Depreciation Methods.

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

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