What Is MACRS for Taxes?
If you own eligible property that has a useful, determinable life of more than one year and you use the property in your business or income-producing activity, you can depreciate the property on your tax return. Eligible property includes most types of tangible property (except land), including buildings, furniture, equipment, machinery and vehicles. Certain intangible property, such as patents, copyrights and computer software, are also depreciable. The Internal Revenue Service requires that you use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most tangible property.
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MACRS
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MACRS is divided into two depreciation systems: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). The two systems provide different depreciation methods and recovery periods. Most of the time, you use GDS unless the law requires ADS use or you make a special election to use ADS.
Use of ADS
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The IRS requires the use of ADS for listed property that you use 50 percent or less in a qualified business. Listed property includes cars and other transportation, property used for entertainment and some computers. Other required uses of ADS are for tangible property used mostly outside the U.S., tax-exempt use property, tax-exempt bond-financed property, and imported property from a foreign country that has a presidential executive order in effect because the country has trade restrictions or other discriminatory practices. The IRS also requires ADS for all property used mostly in a farming business and placed in service during a tax year that offered the election not to use the uniform capitalization rules for certain farming costs.
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GDS
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GDS has nine property classifications, based mostly on recovery period (number of years over which you must depreciate the property). Seven of the classifications range from three-year property to 25-year property. The other two classifications are residential rental property (recovery period of 27.5 years) and nonresidential real property (recovery period of 39 years). Depreciation rules are complex, and they are covered in detail in IRS Publication 946 (see Resources).
Exceptions
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You cannot use MACRS to depreciate the following types of property: intangible property; films, videotapes and recordings; property placed in service before 1987; specified property owned or used in 1986; certain corporate or partnership property attained in a nontaxable transfer; and property you elected to exclude from MACRS. Property you might elect to exclude from MACRS is property for which you can use a depreciation method not based on a term of years, such as the unit-of-production method.
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