What Does Recovery Period Mean for Taxes?

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Recovery period is a term the Internal Revenue Service uses to indicate the amount of time you can recover the cost of an asset tax purposes. The IRS uses the modified accelerated cost recovery system to determine this recovery period; MACRS assigns a specific useful life to different types of assets. This useful life then serves as a guideline for determining the recovery period of an asset for taxation.

Defining a Recovery Period

In most cases when applied to the tax system, recovery period applies to a business owner who invests in a business by purchasing a capital asset. For example, the purchase of a machine or the construction of a building would qualify as a capital asset. Over time, the IRS allows you to depreciate the costs of these assets. This depreciation counts as a deduction on your itemized tax return.

What Is MACRS?

The Tax Reform Act of 1986 created the MACRS, the tax depreciation system used in the United States. Under this system, the value of assets depreciates over time. Therefore, as cost recovery occurs, account for this accelerated depreciation while recovering the cost of the asset. This requires every asset to use a standardized depreciation schedule for tax-reporting purposes.

Deducting Depreciation

The U.S. tax code allows you take deductions for depreciation on both individual and corporate tax returns. To standardize these deductions, the IRS requires the use of standardized codes, including MACRS. You then can use these standardized codes to properly calculate the amount of depreciation to claim for a specific tax year. These calculations require you to identify various classes of assets according to the nature and purpose of the assets.

Recovery Periods and Depreciation

When the IRS calculates the duration of time for a recovery period, this time period directly affects your depreciation calculations over time. Specifically, the recovery period impacts the calculated depreciation value for the current tax year. The IRS publishes depreciation schedules for different classes of assets that list the length of the recovery period for the asset and the depreciation percentage to use for every year of the recovery period.

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