Definition
The Modified Accelerated Cost Recovery System (MACRS) is a method of depreciation in the United States used for tax purposes. Introduced by the Internal Revenue Service (IRS) in 1986, MACRS allows property owners to recover the cost of tangible property over specific periods through annual depreciation deductions. These periods vary depending on the type of property.
MACRS is comprised of two sub-systems: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Most properties fall under GDS, which typically offers more accelerated depreciation compared to ADS.
Examples
1. Commercial and Industrial Property
For commercial and industrial properties, the MACRS system uses a straight-line method over a recovery period of 39 years. This means the property’s cost is evenly deducted over 39 years.
2. Residential Rental Property
Residential rental properties such as apartments and rental houses use a straight-line method over a recovery period of 27.5 years.
Frequently Asked Questions
What types of properties are eligible for MACRS?
MACRS applies to tangible property used for business or income-producing activities. This includes, but is not limited to, commercial buildings, industrial equipment, and residential rental properties.
How does MACRS impact tax liabilities?
MACRS allows for accelerated depreciation, which means larger depreciation deductions can be taken in the earlier years of the asset’s life. This reduces taxable income in those years, thereby reducing tax liabilities.
What is the difference between GDS and ADS?
GDS (General Depreciation System) is the default system under MACRS and offers accelerated depreciation for most properties. ADS (Alternative Depreciation System) provides a longer recovery period for depreciation and is used under specific conditions such as property being used predominantly outside the United States or electing ADS for tax or record-keeping purposes.
Are there limits to the property cost that can be depreciated using MACRS?
Yes, specific limitations exist, particularly for luxury automobiles and other specified vehicles, where the maximum deduction amounts are capped. Additionally, vehicles under ADS have different depreciation rules.
Can land be depreciated under MACRS?
No, land is not depreciable. Only the structures or improvements on the land can be depreciated.
Related Terms
Cost Segregation
Cost Segregation is a method involving the identification of assets and their costs, allowing faster recovery periods through accelerated depreciation. This technique is often used to maximize tax benefits by identifying personal property assets that can be depreciated quicker, compared to real property.
Tangible Property
Tangible Property refers to physical assets that can be touched, such as machinery, buildings, and land improvements.
Straight-Line Depreciation
Straight-Line Depreciation is a method of evenly allocating the cost of an asset over its useful life. Under MACRS, it is primarily used for real property.
Online Resources
References
- Internal Revenue Service. Publication 946: How to Depreciate Property. IRS.gov
- Investopedia Editorial Team. “What is MACRS?” Investopedia
Suggested Books
- “Depreciation: A Practical Guide” by CCH Tax Law Editors
- “Principles of Real Estate Practice” by Stephen Mettling, David Cusic
- “Real Estate Accounting Made Easy” by Obioma A. Ebisike
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