Depreciation under the Modified Accelerated Cost Recovery System (MACRS) is the primary method used to recover the cost of tangible property placed in service after 1986. MACRS includes two systems: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Under MACRS, assets are categorized into classes with predetermined recovery periods, and depreciation is calculated using specific percentages over those periods.
Recovery Periods for MACRS Property
- 3-year property: 3 years
- 5-year property: 5 years
- 7-year property: 7 years
- 10-year property: 10 years
- 15-year property: 15 years
- 20-year property: 20 years
- 25-year property: 25 years
- Residential rental property: 27.5 years
- Nonresidential real property: 39 years
- Railroad gradings and tunnel bores: 50 years
Basis for Depreciation
The depreciable basis is determined by multiplying the cost or other basis of the property by the percentage of business/investment use. From this, subtract any applicable credits or deductions, including:
- Section 179 expense deduction
- Deduction for removal of barriers to the disabled and elderly
- Disabled access credit
- Enhanced oil recovery credit
- Credit for alternative fuel vehicle refueling property
- Credit for employer-provided childcare facilities and services
- Special depreciation allowance (if claimed)
- Basis adjustments for investment credit or advanced manufacturing investment credit property
MACRS Recapture
If depreciable property is sold, exchanged, or otherwise disposed of, some or all of the gain may be subject to depreciation recapture rules.
- Section 1245 property generally requires recapture of depreciation deductions as ordinary income to the extent provided by law.
- Special rules apply to Section 1250 property and real property.
- The amount of recapture depends on the type of property and the depreciation deductions previously allowed or allowable.
Alternative Depreciation System (ADS)
ADS generally requires straight-line depreciation over specified recovery periods.
Examples include:
- Residential rental property generally uses a 30-year recovery period for property placed in service after 2017.
- Nonresidential real property generally uses a 40-year recovery period.
- Railroad grading and tunnel bores generally use a 50-year recovery period.
ADS is required for certain types of property and may also be elected by the taxpayer in some circumstances.
Disposal of MACRS Property
If you dispose of MACRS property during the tax year, special rules apply to determining the allowable depreciation deduction and adjusted basis.
If only part of an asset is disposed of, the basis and depreciation attributable to the disposed portion must be properly allocated according to IRS rules.
Reporting on Form 4562
Form 4562 is used to:
- Claim the Section 179 expense deduction
- Claim the special depreciation allowance
- Claim MACRS depreciation deductions
- Report listed property
- Report amortization deductions
Taxpayers must maintain adequate depreciation records and supporting documentation for all depreciable property.
Source:
Form 4562 Instructions
Disclaimer: Always verify details with current Federal or State Department of Revenue Forms and Instructions. For complex tax situations, consult a CPA or tax attorney.