Depreciation and Other Information - MACRS
MACRS (Modified Accelerated Cost Recovery System) is the primary method used in the United States for calculating depreciation deductions for tangible property placed in service. It allows taxpayers to recover the cost of certain business and investment property over a specified recovery period.
What Property Can Be Depreciated?
- Tangible property used in a trade or business or for the production of income.
- Property must have a useful life of more than one year.
- Examples include buildings, machinery, vehicles, and office equipment.
What Property Cannot Be Depreciated?
- Land (not depreciable).
- Property used for personal purposes (unless used in a trade or business).
- Property with a useful life of one year or less.
When Does Depreciation Begin and End?
- Depreciation begins when the property is placed in service for use in a trade or business or for the production of income.
- Depreciation ends when the property is fully depreciated or disposed of.
MACRS Depreciation Method
The MACRS system uses the 200% declining balance method, switching to straight-line when it becomes more beneficial. The half-year convention applies to most property, meaning you are treated as having placed the property in service halfway through the year.
Recovery Periods and Depreciation Percentages
Recovery periods vary by property class:
- 3-year property: 33.33% in year 1, 44.45% in year 2, 14.81% in year 3, 7.41% in year 4
- 5-year property: 20.00% in year 1, 32.00% in year 2, 19.20% in year 3, 11.52% in year 4, 11.52% in year 5, 5.76% in year 6
- 7-year property: 14.29% in year 1, 24.49% in year 2, 17.49% in year 3, 12.49% in year 4, 8.93% in year 5, 8.92% in year 6, 8.93% in year 7, 4.46% in year 8
How to Figure Depreciation Deduction
- Determine the depreciation system (MACRS).
- Identify the property class and recovery period.
- Apply the appropriate depreciation percentage from IRS tables.
- Use Form 4562 to report depreciation deductions.
When to File Form 4562
You must file Form 4562 if you are claiming depreciation deductions for any property placed in service during the tax year or if you are changing your accounting method for depreciation.
Correcting Incorrect Depreciation
If you claimed depreciation incorrectly, you may need to file Form 3115 (Application for Change in Accounting Method) to correct it.
Source:
Form 4562 - Depreciation and Amortization
Publication 225 - Farmer's Tax Guide
Publication 946 - How To Depreciate Property
Publication 551 - Basis of Assets
Disclaimer: Always verify information with official Federal or State Department of Revenue Forms and Instructions.