MACRS refers to “modified accelerated cost recovery system,” which is the default depreciation method used for tax purposes.
Within MACRS there are two depreciation methods: general depreciation system (GDS) and alternate depreciation system (ADS). For the vast majority of taxpayers who must calculate deprecation, GDS will be used.
Does MACRS Apply?
MACRS always applies except in the following circumstances:
You cannot use MACRS to depreciate the following property.
- Property you placed in service before 1987.
- Certain property owned or used in 1986.
- Intangible property.
- Films, video tapes, and recordings.
- Certain corporate or partnership property acquired in a nontaxable transfer.
- Property you elected to exclude from MACRS.
From IRS Publication 946.
GDS or ADS?
MACRS using the general depreciation system is the standard method of depreciation for tax purposes. For most taxpayers, ADS will only be used for “listed property” (such as cars and electronics) that is used for both personal and business purposes and the business-use portion is less than 50%.
When using GDS, the next step is to determine the recovery period. There are 9 recovery periods to choose from, ranging from 3 years to 39 years. For example, computers are depreciated over 5 years. Residential rental property is depreciated over 27.5 years. Commercial property is depreciated over 39 years.
Note that these depreciation periods are set by the IRS and may not match up to how long you’ll actually use the property. For example, you might intend to replace your computer after 3 years. For tax purposes, you still depreciate it over 5 years.
For more information on depreciation, consult IRS Publication 946.
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