Acct 2220 - Federal Tax Depreciation (MACRS)
Handout #5
Overview (2014 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 aperiod 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 property / Tractor units, racehorses over two years old, and horses over 12 years old when placed in service.
5-year property / Automobiles, taxis, buses, trucks, computers and peripheral equipment, office machinery (faxes, copiers, calculators etc.), and any property used in research and experimentation. Also includes breeding and dairy cattle.
7-year property / Office furniture and fixtures, and any property that has not been designated as belonging to another class.
10-year property / Vessels, barges, tugs, similar water transportation equipment, single-purpose agricultural or horticultural structures, and trees or vines bearing fruit or nuts.
15-year property / Depreciable improvements to land such as shrubbery, fences, roads, and bridges.
20-year property / Farm buildings that are not agricultural or horticultural structures.
27.5-year property / Residential rental property (i.e. Duplexes Apartments). This also includes furnaces, hot water tanks & roofs (but not stoves, fridges).
39-year property / Nonresidential real estate, including home offices.

Note: Land, itself, is not depreciable (for either tax or financial accounting purposes because it has no “determinable life”).

Handout #6: 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 exceptionexists called the IRC“Section 179Expensing” Election.
While many rules and exceptions apply, thisFederal tax law provision generally allows business the option of claiminga taxdeduction in the first year for the entire cost of qualifying assets purchased. For 2012 and 2013, this amount was up to $500,000.
For 2014, 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!