Definition
The Modified Accelerated Cost Recovery System (MACRS) is the method used for most tangible property depreciation on federal returns. Section 168(c) assigns property to classes with recovery periods of 3, 5, 7, 10, 15 and 20 years, 25 years for water utility property, 27.5 years for residential rental property and 39 years for nonresidential real property. Most personal property uses the half-year convention. The mid-quarter convention applies when more than 40 percent of the aggregate basis of property placed in service in the year, excluding real property, is placed in service in the last three months. Real property uses the mid-month convention. Depreciation is reported on Form 4562.
Why it matters in an audit or review
MACRS is the tax side of the book-tax difference for fixed assets. Auditors compare the tax depreciation schedule with the book register to support the deferred tax liability and check that classes and conventions were applied correctly.
Example
Illustrative: a $70,000 machine is 7-year property placed in service under the half-year convention, with no bonus or section 179. The Publication 946 table rate for year one is 14.29%, so depreciation is $70,000 x 14.29% = $10,003.
Common mistakes
- Missing the mid-quarter test after heavy fourth-quarter purchases.
- Using book lives for tax.
Sources
- Internal Revenue Code section 168(b), (c), (d): https://www.law.cornell.edu/uscode/text/26/168
- IRS, Publication 946, How To Depreciate Property: https://www.irs.gov/publications/p946
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error