Examples
The following examples are provided to show you how to use the percentage tables. In both examples, assume the following.
- You use the property only for business.
- You use the calendar year as your tax year.
- You use GDS for all the properties.
Example 1. You bought a building and land for $120,000 and placed it in service on March 8. The sales contract showed the building cost $100,000 and the land cost $20,000. It is nonresidential real property. The building's unadjusted basis is its original cost, $100,000.
You refer to the MACRS Percentage Table Guide in Appendix A and find that you should use Table A-7a. March is the third month of your tax year, so multiply the building's unadjusted basis, $100,000, by the percentages for the third month in Table A-7a. Your depreciation deduction for each of the first 3 years is as follows:
| Year |
|
Basis | Percentage | Deduction |
| 1st |
$ |
100,000 |
2.033% |
|
$2,033 |
|
| 2nd |
|
100,000 |
2.564 |
|
2,564 |
|
| 3rd |
|
100,000 |
2.564 |
|
2,564 |
|
Example 2. During the year, you bought a machine (7-year property) for $4,000, office furniture (7-year property) for $1,000, and a computer (5-year property) for $5,000. You placed the machine in service in January, the furniture in September, and the computer in October. You do not elect a section 179 deduction and elect not to claim a special depreciation allowance for these items.
You placed property in service during the last three months of the year, so you must first determine if you have to use the mid-quarter convention. The total bases of all property you placed in service during the year is $10,000. The $5,000 basis of the computer, which you placed in service during the last 3 months (the fourth quarter) of your tax year, is more than 40% of the total bases of all property ($10,000) you placed in service during the year. Therefore, you must use the mid-quarter convention for all three items.
You refer to the MACRS Percentage Table Guide in Appendix A to determine which table you should use under the mid-quarter convention. The machine is 7-year property placed in service in the first quarter, so you use Table A-2. The furniture is 7-year property placed in service in the third quarter, so you use Table A-4. Finally, because the computer is 5-year property placed in service in the fourth quarter, you use Table A-5. Knowing what table to use for each property, you figure the depreciation for the first 2 years as follows.
| Year |
Property |
Basis |
Percentage | Deduction |
| 1st |
Machine |
$4,000 |
25.00 |
$1,000 |
|
| 2nd |
Machine |
4,000 |
21.43 |
857 |
|
| 1st |
Furniture |
1,000 |
10.71 |
107 |
|
| 2nd |
Furniture |
1,000 |
25.51 |
255 |
|
| 1st |
Computer |
5,000 |
5.00 |
250 |
|
| 2nd |
Computer |
5,000 |
38.00 |
1,900 |
|
Sale or Other Disposition Before the Recovery Period Ends
If you sell or otherwise dispose of your property before the end of its recovery period, your depreciation deduction for the year of the disposition will be only part of the depreciation amount for the full year. You have disposed of your property if you have permanently withdrawn it from use in your business or income-producing activity because of its sale, exchange, retirement, abandonment, involuntary conversion, or destruction. After you figure the full-year depreciation amount, figure the deductible part using the convention that applies to the property.
Half-year convention used. For property for which you used a half-year convention, the depreciation deduction for the year of the disposition is half the depreciation determined for the full year.
Mid-quarter convention used. For property for which you used the mid-quarter convention, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter in which you disposed of the property.
| Quarter |
Percentage |
| First |
12.5% |
| Second |
37.5 |
| Third |
62.5 |
| Fourth |
87.5 |
Example. On December 2, 2000, you placed an item of 5-year property in service in your business. The property cost $10,000 and you did not claim a section 179 deduction. Your unadjusted basis for the property was $10,000. You used the mid-quarter convention because this was the only item of business property you placed in service in 2000 and it was placed in service during the last 3 months of your tax year. Your property is in the 5-year property class, so you used Table A-5 to figure your depreciation deduction. Your deductions for 2000 and 2001 were $500 (5% of $10,000) and $3,800 (38% of $10,000). You disposed of the property on April 6, 2002. To determine your depreciation deduction for 2002, first figure the deduction for the full year. This is $2,280 (22.8% of $10,000). April is in the second quarter of the year, so you multiply $2,280 by 37.5% to get your depreciation deduction of $855 for 2002.
Mid-month convention used. If you dispose of residential rental or nonresidential real property, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by a fraction. The numerator of the fraction is the number of months (including partial months) in the year that the property is considered in service. The denominator is 12.
Example. On July 2, 2000, you purchased and placed in service residential rental property. The property cost $100,000, not including the cost of land. You used Table A-6 to figure your MACRS depreciation for this property. You sold the property on March 2, 2002. You file your tax return based on the calendar year.
A full year of depreciation for 2002 is $3,636. This is $100,000 multiplied by .03636 (the percentage for the seventh month of the third recovery year) from Table A-6. You then apply the mid-month convention for the 2½ months of use in 2001. (Treat the month of disposition as one-half month of use.) Multiply $3,636 by 2.5 and divide by 12 to get your 2002 depreciation deduction of $757.50.
Figuring the Deduction Without Using the Tables
Instead of using the rates in the percentage tables to figure your depreciation deduction, you can figure it yourself. Before making the computation each year, you must reduce your adjusted basis in the property by the depreciation claimed the previous year.
Figuring MACRS deductions without using the tables generally will result in a slightly different amount than using the tables.
Declining Balance Method
When using a declining balance method, you apply the same depreciation rate each year to the adjusted basis of your property. You must use the applicable convention and you must switch to the straight line method in the first year for which it will give an equal or greater deduction. The straight line method is explained later.
You figure depreciation for the year you place property in service as follows.
- Multiply your adjusted basis in the property by the declining balance rate.
- Apply the applicable convention.
You figure depreciation for all other years (before the year you switch to the straight line method) as follows.
- Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years.
- Multiply this new adjusted basis by the same declining balance rate used in earlier years.
If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it.
Figuring depreciation under the declining balance method and switching to the straight line method is illustrated in Example 1, later, under Examples.
Declining balance rate. You figure your declining balance rate by dividing the specified declining balance percentage (150% or 200% changed to a decimal) by the number of years in the property's recovery period. For example, for 3-year property depreciated using the 200% declining balance method, divide 2.00 (200%) by 3 to get 0.6667, or a 66.67% declining balance rate. For 15-year property depreciated using the 150% declining balance method, divide 1.50 (150%) by 15 to get 0.10, or a 10% declining balance rate.
The following table shows the declining balance rate for each property class and the first year for which the straight line method gives an equal or greater deduction.
| Property Class |
Method |
Declining Balance Rate |
Year |
| 3-year |
200% DB |
66.667% |
3rd |
| 5-year |
200% DB |
40.0 |
4th |
| 7-year |
200% DB |
28.571 |
5th |
| 10-year |
200% DB |
20.0 |
7th |
| 15-year |
150% DB |
10.0 |
7th |
| 20-year |
150% DB |
7.5 |
9th |
Straight Line Method
When using the straight line method, you apply a different depreciation rate each year to the adjusted basis of your property. You must use the applicable convention in the year you place the property in service and the year you dispose of the property.
You figure depreciation for the year you place property in service as follows.
- Multiply your adjusted basis in the property by the straight line rate.
- Apply the applicable convention.
You figure depreciation for all other years (including the year you switch from the declining balance method to the straight line method) as follows.
- Reduce your adjusted basis in the property by the depreciation allowed or allowable in earlier years (under any method).
- Determine the depreciation rate for the year.
- Multiply the adjusted basis figured in (1) by the depreciation rate figured in (2).
If you dispose of property before the end of its recovery period, see Using the Applicable Convention, later, for information on how to figure depreciation for the year you dispose of it.
Straight line rate. You determine the straight line depreciation rate for any tax year by dividing the number 1 by the years remaining in the recovery period at the beginning of that year. When figuring the number of years remaining, you must take into account the convention used in the year you placed the property in service. If the number of years remaining is less than 1, the depreciation rate for that tax year is 1.0 (100%).
Using the Applicable Convention
The applicable convention (discussed earlier under Which Convention Applies?) affects how you figure your depreciation deduction for the year you place your property in service and for the year you dispose of it. It determines how much of the recovery period remains at the beginning of each year, so it also affects the depreciation rate for property you depreciate under the straight line method. See Straight line rate in the previous discussion. Use the applicable convention as explained in the following discussions.
Half-year convention. If this convention applies, you deduct a half-year of depreciation for the first year and the last year that you depreciate the property. You deduct a full year of depreciation for any other year during the recovery period.
Figure your depreciation deduction for the year you place the property in service by dividing the depreciation for a full year by 2. If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final 6 months of the recovery period is the amount of your unrecovered basis in the property.
Mid-quarter convention. If this convention applies, the depreciation you can deduct for the first year you depreciate the property depends on the quarter in which you place the property in service.
A quarter of a full 12-month tax year is a period of three months. The first quarter in a year begins on the first day of the tax year. The second quarter begins on the first day of the fourth month of the tax year. The third quarter begins on the first day of the seventh month of the tax year. The fourth quarter begins on the first day of the tenth month of the tax year. A calendar year is divided into the following quarters.
| Quarter |
Months |
| First |
January, February, March |
| Second |
April, May, June |
| Third |
July, August, September |
| Fourth |
October, November, December |
Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by the percentage listed below for the quarter you place the property in service.
| Quarter |
Percentage |
| First |
87.5% |
| Second |
62.5 |
| Third |
37.5 |
| Fourth |
12.5 |
If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition by multiplying a full year of depreciation by the percentage listed below for the quarter you dispose of the property.
| Quarter |
Percentage |
| First |
12.5% |
| Second |
37.5 |
| Third |
62.5 |
| Fourth |
87.5 |
If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final quarter of the recovery period is the amount of your unrecovered basis in the property.
Mid-month convention. If this convention applies, the depreciation you can deduct for the first year that you depreciate the property depends on the month in which you place the property in service. Figure your depreciation deduction for the year you place the property in service by multiplying the depreciation for a full year by a fraction. The numerator (top number) of the fraction is the number of full months in the year that the property is in service plus 1/ (or 0.5). The denominator (bottom number) is 12.
If you dispose of the property before the end of the recovery period, figure your depreciation deduction for the year of the disposition the same way. If you hold the property for the entire recovery period, your depreciation deduction for the year that includes the final month of the recovery period is the amount of your unrecovered basis in the property.
Example. You use the calendar year and place nonresidential real property in service in August. The property is in service 4 full months (September, October, November, and December). Your numerator is 4.5 (4 full months plus 0.5). You multiply the depreciation for a full year by 4.5/12, or 0.375.
Examples
The following examples show how to figure depreciation under MACRS without using the percentage tables. Figures are rounded for purposes of the examples. Assume for all the examples that you use a calendar year as your tax year.
Example 1 - 200% DB method and half-year convention. In February, you placed in service depreciable property with a 5-year recovery period and a basis of $1,000. You do not elect to take the section 179 deduction and elect not to claim a special depreciation allowance. You use GDS and the 200% declining balance (DB) method to figure your depreciation. When the straight line (SL) method results in an equal or larger deduction, you switch to the SL method. You did not place any property in service in the last three months of the year, so you must use the half-year convention.
First year. You figure the depreciation rate under the 200% DB method by dividing 2 (200%) by 5 (the number of years in the recovery period). The result is 40%. You multiply the adjusted basis of the property ($1,000) by the 40% DB rate. You apply the half-year convention by dividing the result ($400) by 2. Depreciation for the first year under the 200% DB method is $200.
You figure the depreciation rate under the straight line (SL) method by dividing 1 by 5, the number of years in the recovery period. The result is 20%.You multiply the adjusted basis of the property ($1,000) by the 20% SL rate. You apply the half-year convention by dividing the result ($200) by 2. Depreciation for the first year under the SL method is $100.
The DB method provides a larger deduction, so you deduct the $200 figured under the 200% DB method.
Second year. You reduce the adjusted basis ($1,000) by the depreciation claimed in the first year ($200). You multiply the result ($800) by the DB rate (40%). Depreciation for the second year under the 200% DB method is $320.
You figure the SL depreciation rate by dividing 1 by 4.5, the number of years remaining in the recovery period. (Based on the half-year convention, you used only half a year of the recovery period in the first year.) You multiply the reduced adjusted basis ($800) by the result (22.22%). Depreciation under the SL method for the second year is $178.
The DB method provides a larger deduction, so you deduct the $320 figured under the 200% DB method.
Third year. You reduce the adjusted basis ($800) by the depreciation claimed in the second year ($320). You multiply the result ($480) by the DB rate (40%). Depreciation for the third year under the 200% DB method is $192.
You figure the SL depreciation rate by dividing 1 by 3.5. You multiply the reduced adjusted basis ($480) by the result (28.57%). Depreciation under the SL method for the third year is $137.
The DB method provides a larger deduction, so you deduct the $192 figured under the 200% DB method.
Fourth year. You reduce the adjusted basis ($480) by the depreciation claimed in the third year ($192). You multiply the result ($288) by the DB rate (40%). Depreciation for the fourth year under the 200% DB method is $115.
You figure the SL depreciation rate by dividing 1 by 2.5. You multiply the reduced adjusted basis ($288) by the result (40%). Depreciation under the SL method for the fourth year is $115.
The SL method provides an equal deduction, so you switch to the SL method and deduct the $115.
Fifth year. You reduce the adjusted basis ($288) by the depreciation claimed in the fourth year ($115) to get the reduced adjusted basis of $173. You figure the SL depreciation rate by dividing 1 by 1.5. You multiply the reduced adjusted basis ($173) by the result (66.67%). Depreciation under the SL method for the fifth year is $115.
Sixth year. You reduce the adjusted basis ($173) by the depreciation claimed in the fifth year ($115) to get the reduced adjusted basis of $58. There is less than one year remaining in the recovery period, so the SL depreciation rate for the sixth year is 100%. You multiply the reduced adjusted basis ($58) by 100% to arrive at the depreciation deduction for the sixth year ($58).
Example 2 - SL method and mid-month convention. In January you bought and placed in service a building for $100,000 that is nonresidential real property with a recovery period of 39 years. The adjusted basis of the building is its cost of $100,000. You use GDS, the straight line (SL) method, and the mid-month convention to figure your depreciation.
First year. You figure the SL depreciation rate for the building by dividing 1 by 39 years. The result is .02564. The depreciation for a full year is $2,564 ($100,000 × .02564). Under the mid-month convention, you treat the property as placed in service in the middle of January. You get 11.5 months of depreciation for the year. Expressed as a decimal, the fraction of 11.5 months divided by 12 months is .958. Your first-year depreciation for the building is $2,456 ($2,564 × .958).
Second year. You subtract $2,456 from $100,000 to get your adjusted basis of $97,544 for the second year. The SL rate is .02629. This is 1 divided by the remaining recovery period of 38.042 years (39 years reduced by 11.5 months or .958 year). Your depreciation for the building for the second year is $2,564 ($97,544 × .02629).
Third year. The adjusted basis is $94,980 ($97,544 - $2,564). The SL rate is .027 (1 divided by 37.042 remaining years). Your depreciation for the third year is $2,564 ($94,980 × .027).
Example 3 - 200% DB method and mid-quarter convention. During the year you bought and placed in service in your business the following items.
| Item |
Month Placed in Service |
Cost |
| Safe |
January |
$4,000 |
| Office furniture |
September |
1,000 |
| Computer (not listed property) |
October |
5,000 |
declining balance (DB) method to figure the depreciation. The total bases of all property you placed in service this year is $10,000. The basis of the computer ($5,000) is more than 40% of the total bases of all property placed in service during the year ($10,000), so you must use the mid-quarter convention. This convention applies to all three items of property. The safe and office furniture are 7-year property and the computer is 5-year property.
The 200% DB rate for 7-year property is .28571. You determine this by dividing 2.00 (200%) by 7 years. The depreciation for the safe for a full year is $1,143 ($4,000 × .28571). You placed the safe in service in the first quarter of your tax year, so you multiply $1,143 by 87.5% (the mid-quarter percentage for the first quarter). The result, $1,000, is your deduction for depreciation on the safe for the first year.
For the second year, the adjusted basis of the safe is $3,000. You figure this by subtracting the first year's depreciation ($1,000) from the basis of the safe ($4,000). Your depreciation deduction for the second year is $857 ($3,000 × .28571).
The furniture is also 7-year property, so you use the same 200% DB rate of .28571. You multiply the basis of the furniture ($1,000) by .28571 to get the depreciation of $286 for the full year. You placed the furniture in service in the third quarter of your tax year, so you multiply $286 by 37.5% (the mid-quarter percentage for the third quarter). The result, $107, is your deduction for depreciation on the furniture for the first year.
For the second year, the adjusted basis of the furniture is $893. You figure this by subtracting the first year's depreciation ($107) from the basis of the furniture ($1,000). Your depreciation for the second year is $255 ($893 × .28571).
The 200% DB rate for 5-year property is .40. You determine this by dividing 2.00 (200%) by 5 years. The depreciation for the computer for a full year is $2,000 ($5,000 × .40). You placed the computer in service in the fourth quarter of your tax year, so you multiply the $2,000 by 12.5% (the mid-quarter percentage for the fourth quarter). The result, $250, is your deduction for depreciation on the computer for the first year.
For the second year, the adjusted basis of the computer is $4,750. You figure this by subtracting the first year's depreciation ($250) from the basis of the computer ($5,000). Your depreciation deduction for the second year is $1,900 ($4,750 × .40).
Example 4 - 200% DB method and half-year convention. Last year, in July, you bought and placed in service in your business an item of 7-year property. This was the only item of property you placed in service last year. The property cost $20,000 and you elected a $10,000 section 179 deduction. Your unadjusted basis for the property is $10,000. Because you did not place any property in service in the last 3 months of your tax year, you used the half-year convention. You figured your deduction using the percentages in Table A-1 for 7-year property. Last year, your depreciation was $1,429 ($10,000 × 14.29%).
In July of this year, your property was vandalized. You had a deductible casualty loss of $3,000. You spent $3,500 to put the property back in operational order. Your adjusted basis at the end of this year is $9,071. You figured this by first subtracting the first year's depreciation ($1,429) and the casualty loss ($3,000) from the unadjusted basis of $10,000. To this amount ($5,571), you then added the $3,500 repair cost.
You cannot use the table percentages to figure your depreciation for this property for this year because of the adjustments to basis. You must figure the deduction yourself. You determine the DB rate by dividing 2.00 (200%) by 7 years. The result is .28571 or 28.571%. You multiply the adjusted basis of your property ($9,071) by the declining balance rate of .28571 to get your depreciation deduction of $2,592 for this year.
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