Acct 2210 - Federal Tax Depreciation (MACRS)
Handout – Review for Chp 8 Class Discussion
Overview (2015 Update):
For Federal tax purposes, the tax depreciation method required for a particular long-term asset is
determined at the time you first “place the asset in service”. Whatever rules or tables are in effect
for that year must be followed as long as you own the property. Since Congress has changed the
depreciation rules many times over the years, you may have to use a number of different
depreciation methods if you've owned different kinds of business property over a period of time.
For most business property placed in service after 1986, if you don't claim the IRC Section 179
deduction (discussed on the next page) for the full cost of the item, IRS requires you to depreciate
the asset using a method called "MACRS," which stands for Modified Accelerated Cost
Recovery System. This method categorizes business assets into classes and specifies the time
period over which you can depreciate assets in each class. The most commonly used items are
classified in the following chart:
Class of
Property
Items Included
3-year Tractor units, racehorses over two years old, and horses over 12
property years old when placed in service.
Automobiles, taxis, buses, trucks, computers and peripheral
5-year equipment, office machinery (faxes, copiers, calculators etc.), and
property any property used in research and experimentation. Also includes
breeding and dairy cattle.
7-year Office furniture and fixtures, and any property that has not been
property designated as belonging to another class.
Vessels, barges, tugs, similar water transportation equipment,
10-year
single-purpose agricultural or horticultural structures, and trees or
property
vines bearing fruit or nuts.
15-year Depreciable improvements to land such as shrubbery, fences,
property roads, and bridges.
20-year Farm buildings that are not agricultural or horticultural
property structures.
27.5-year Residential rental property (i.e. Duplexes & Apartments). This also
property includes furnaces, hot water tanks & roofs (but not stoves, fridges).
39-year Nonresidential real estate, including home offices.
property
Note: Land, itself, is not depreciable (for either tax or financial
accounting purposes because it has no “determinable life”).
Class Handout: MACRS Depr Schedules
Tax
Year
MACRS Depreciation rate for recovery period
Based upon 200% DDB Method and half-year convention
3-year
5-year
7-year
10-year
15-year
20-year
1
33.33%
20.00%
14.29%
10.00%
5.00%
3.750%
2
44.45
32.00
24.49
18.00
9.50
7.219
3
14.81
19.20
17.49
14.40
8.55
6.677
4
7.41
11.52
12.49
11.52
7.70
6.177
5
11.52
8.93
9.22
6.93
5.713
6
5.76
8.92
7.37
6.23
5.285
7
8.93
6.55
5.90
4.888
8
4.46
6.55
5.90
4.522
9
6.56
5.91
4.462
10
6.55
5.90
4.461
11
3.28
5.91
4.462
12
5.90
4.461
13
5.91
4.462
14
5.90
4.461
15
5.91
4.462
16
2.95
4.461
17
4.462
18
4.461
19
4.462
20
4.461
21
2.231
IRC Sec 179 Note: Writing off (expensing) the Asset in the year acquired.
Normally, you can't take a current Federal tax deduction for the entire cost of an asset
in the year of purchase because the asset's usefulness will extend beyond the year in
which it was purchased. For tax purposes, an asset must generally be depreciated per
the grid above. An exception exists called the IRC “Section 179 Expensing” Election.
While many rules and exceptions apply, this Federal tax law provision generally allows
business the option of claiming a tax deduction in the first year for the entire cost of
qualifying assets purchased. For 2012 - 2014, this amount was up to $500,000.
For 2015, this amount is currently only $25,000! (legislative action pending).
This incentive, legislated by Congress, is meant to encourage businesses to buy
equipment, invest in their own businesses, and thereby create economic activity.
The law has changed many times over the years. For comparison, the 2002 limit
was only $24,000. This is one example of Congress using tax policy to achieve
certain goals. A powerful tool to manipulate social and/or economic conditions!