History
Tax deductions for depreciation have been allowed in the U.S. since the inception of the income tax. Prior to 1971, these deductions could be computed in a variety of manners over a wide range of lives, under old Bulletin F. In 1971, Congress introduced the Class Life Asset Depreciation Range (ADR) system in an attempt to simplify calculations and provide some uniformity. Under ADR, the IRS prescribed lives for classes of assets based on the nature or use of the asset. Such classes included general classes (such as office equipment) and industry classes (such as assets used in the manufacture of rubber goods). Taxpayers could use their choice of several methods of depreciating assets, including straight line, declining balance, and sum of years digits. Asset costs and accumulated depreciation were tracked by "vintage accounts" consisting of all assets within a class acquired in a particular tax year. All vintage accounts for the same year were assumed placed in service in the middle of the year; however, a taxpayer could elect the modified half year convention with potentially favorable results. In 1981, Congress again changed the depreciation system, providing generally for shorter lives for recovery of costs. Under the Accelerated Cost Recovery System (ACRS), broad groups of assets were assigned based on the old ADR lives (which the IRS has updated since). Taxpayers were permitted to calculate depreciation only under the declining balance method switching to straight line or the straight line method. Other changes applied as well. The present MACRS system was adopted as part of theDepreciable lives by class
Under MACRS, a taxpayer must compute tax deductions forDepreciation methods
Only the declining balance method and straight line method of computing depreciation are allowed under MACRS. Taxpayers using the declining balance change to the straight line method at the point at which depreciation deductions are optimized. (See the tables below). All tangible personal property acquired during the year is considered placed in service in the middle of the tax year (" half-year convention"). Real property is considered placed in service in the middle of the month in which acquired ("mid-month convention"). Special rules apply for pro rating deductions for short tax years and for the first year of business, or where more than 40% of tangible personal property additions are in the final quarter of the year. The method and life used in depreciating an asset is an accounting method, change of which requires IRS approval. Taxpayers may track the basis and accumulated depreciation of assets individually or in vintage accounts, as in the old ADR system. Where assets are tracked in vintage accounts, a first-in-first-out convention is usually applied to determine basis of assets retired.Special allowances and bonus depreciation
At various times, additional depreciation deductions have been allowed to encourage investment. These allowances generally have had limitations. For example, an additional deduction of 50% of the cost of qualifying property is allowed for certain property acquired after December 31, 2007 and before January 1, 2011 A nearly identical allowance was available for property acquired after September 10, 2001 and before 2005. The IRS recently issued guidance clarifying when taxpayers are eligible for 100 percent bonus depreciation. In addition, the guidance provides procedures for electing 100 percent bonus depreciation and 50 percent bonus depreciation for certain property. In addition to extending the availability of bonus depreciation in general, the Tax Relief Act provided for a new 100 percent depreciation deduction for qualified property that is acquired and placed into service by the taxpayer between September 8, 2010, and January 1, 2014. Special rules have also applied for bio fuel, recycling, and disaster assistance property. ''Decoupling modification'' is a tax terminology resulting from the federal tax law enacted March 9, 2002, which created a new tax deduction for "bonus depreciation" that threatened to cost states very large amounts of revenue. Federal Bonus Depreciation, Section 168(k) of the Internal Revenue Code, allows the acceleration of depreciation on federal tax returns, for example, writing off a higher amount of depreciation for the first year an asset goes into service. States that refuse to accept this method of calculating depreciation for state taxes, for example,Alternative depreciation system
Certain assets must be depreciated under the Alternative Depreciation System (ADS), using specified lives and the straight line method. It may be applied at the election of the taxpayer in lieu of regular depreciation, and it must be used for the following types of property: :* Listed property used 50% or less in a qualified business use. :* Any tangible property used predominantly outside the United States during the year (subject to certain exceptions). :* Any tax-exempt use property. :* Any tax-exempt bond-financed property. :* All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. :* Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. In addition, the ADS must be used for computing depreciation deductions for the Alternative Minimum Tax. ADS lives are the same as regular depreciation lives for a few classes, but are generally somewhat longer than regular lives for most classes.Example
The following example is extracted froMultiple-asset accounts
A taxpayer may group assets together into a general asset account. The grouped assets must have the same life, method of depreciation, convention, additional first year depreciation percentage, and year (or quarter or month) placed in service. Listed property or vehicles cannot be grouped with other assets. Depreciation for the account is computed as if the entire account were a single asset.Retirement of MACRS assets
Gain or loss may be deferred or recognized on retirement of assets under MACRS, at the taxpayer's election. Under default rules, proceeds from disposing of a depreciable asset in a multiple asset account are recognized as ordinary income, and depreciation on the account is unaffected by the retirement. An optional method allows the asset to be removed from the account at the start of the year from retirement, in which case gain or loss is on the asset is subject to regular rules.MACRS property classes table
FroMACRS GDS property classes table
MACRS applicable percentage for property class
FroMACRS percentage for real property table
* The useful life is 39 years for nonresidential real property. Depreciation is straight line using the mid-month convention. Thus a property placed in service in January would be allowed 11½ months depreciation for recovery Year 1.See also
* Capital Cost AllowanceSources
* * IRS Rev. Proc. 87-56 and 87-55 (shown above as tables, as currently updated)References
{{DEFAULTSORT:Macrs Taxation in the United States Depreciation Internal Revenue Code Tax terms