Fixed Asset Depreciation Done Right!

Depreciation Facts

This page contains MACRS depreciation reference materials to help you understand and apply the federal tax rules as they relate to fixed asset depreciation.

  1. MACRS (Modified Accelerated Cost Recovery System)-
    MACRS is a system of recovering the cost of qualifying assets over a period of time as specified by the Internal Revenue code. Qualifying assets are personal property and real property acquired after 1986. Certain assets do not qualify for MACRS depreciation, including intangible assets such as trademarks, patents, goodwill, and off-the-shelf computer software. Instead, intangibles are amortized; goodwill over a 15-year period, and off-the-shelf computer software over a 3-year period.

    The MACRS system specifies the recovery period and the depreciation method to be used. Typical asset recovery periods for personal property are 3, 5, 7 10, 15 and 20 years. Typical recovery periods for real property are 27.5, 31.5, and 39 years. Refer to the table below for typical MACRS recovery periods for certain assets. See Rev. Proc. 87-56 (1987-2 CB 674) as modified by Rev Proc. 88-22 (1988-1 CB 785) for the complete table of class lives and recovery periods published by the IRS.

    MACRS uses the 200% declining-balance method (with a switch to straight-line in the year it is more advantages) for all personal property except personal property with 15 and 20 year recovery periods. For personal property with 15 and 20 year recovery periods, the 150% declining-balance method is used (switching to straight-line in the year it is more advantages). For real property, the straight-line method of depreciation is used. Salvage value is ignored under MACRS.

    In addition, MACRS specifies certain conventions for the first and last years of the recovery period. For personal property, the half-year convention applies. That is, in the year of acquisition and in the last year, a half-year of depreciation is allowed, no matter how long the asset is actually in service during its first or last year. In the year personal property is disposed of, a half-year of depreciation is also allowed. No depreciation is allowed if the asset is both acquired and disposed of during the same tax year.

    There is an exception to the half-year convention that applies to all property except real property, and that is called the mid-quarter convention. If more than 40% of the total cost of such personal property is placed in service during the last three months of the tax year, then the mid-quarter convention applies and all property placed in service during any quarter of that tax year is treated as placed in service at the mid-point of such quarter. For purposes of the 40% test, the basis of property which has been expensed under Section 179, and property that was both acquired and disposed of in the same year are excluded. Tables showing the mid-quarter convention are shown at item 5 below.

    For real property, the mid-month convention applies. Under this convention, a half-month of depreciation is allowed for the month the real property is acquired, and a half-month is allowed in the final month of the property's recovery period. In addition, a half-month is allowed in the month the real property is disposed. For example, if real property is acquired of during a calendar year on July 1st, 5.5 months of depreciation will be allowed during the first year.

    Note that the AMT lives are the same for both regular tax and AMT purposes for assets placed in service in 1999 and later. However, prior to 1999, the AMT lives in most cases were different for AMT purposes than they were for regular tax purposes (see column D below)


Property Type

MACRS

Recovery

Period

AMT

Recovery

Period

(1999 to Present)

AMT

Recovery

Period

(1998 & Prior)

Autos 5 Years 5 Years 5 Years
Trucks-light general purpose (less than 13,000 lbs) 5 Years 5 Years 5 Years
Trucks-heavy general purpose (13,000 lbs or more) 5 Years 5 Years 6 Years
Boats 10 Years 10 Years 18 Years
Computers and peripherals 5 Years 5 Years 5 Years
Telephone systems 5 Years 5 Years 5 Years
Cellular telephones and PDA's 5 Years 5 Years 6 Years
Typewriters, calculators, copiers, fax machines 5 Years 5 Years 6 Years
Office furniture - desks, chairs, filing cabinets, safes, etc. 7 Years 7 Years 10 Years
Carpets and blinds 5 Years 5 Years 9 Years
Race horses, more than 2 years old 3 Years 3 Years 12 Years
Breeding or work horses, 12 years old or less 7 Years 7 Years 10 Years
Assets used in wholesale and retail trade, and professional services 5 Years 5 Years 9 Years
Assets used in construction activities (i.e. by general contractors, real estate subdividers, and developers) 5 Years 5 Years 6 Years
Personal property with no class life 7 Years 7 Years 12 Years
Land improvements (sidewalks, roads, fences, landscaping) 15 Years 15 Years 20 Years
Residental real property 27.5 Years 27.5 Years 40 Years
Commercial real property (1/1/87 to 5/12/93) 31.5 Years 31.5 Years 40 Years
Commercial real property (5/13/93 to present) 39 Years 39 Years 40 Years
   

  1. Additional Bonus Depreciation Deduction -

Date Placed In Service Bonus Depreciation %
09/11/2001 to 05/05/2003 30 % Bonus Depreciation
05/06/2003 to 12/31/2004 50% Bonus Depreciation
01/01/2005 to 12/31/2007 No Bonus Depreciation
01/01/2008 to 9/08/2010 50% Bonus Depreciation
09/09/2010 to 12/31/2011 100% Bonus Depreciation
1/1/2012 to 12/31/2013 50% Bonus Depreciation
1/1/2014 to 12/31/2017 50% Bonus Depreciation
1/1/2018 to 12/31/2018 40% Bonus Depreciation
1/1/2019 to 12/31/2019 30% Bonus Depreciation
   

 

  1. Luxury Auto Depreciation Maximum Limits by Year:

Date Placed in Service Year 1 Year 2 Year3 Year 4 +
After 6/18/84 & Before 1/1/85 $4,000 $6,000 $6,000 $6,000
After 12/31/84 & Before 4/3/85 $4,100 $6,200 $6,200 $6,200
After 4/2/85 & Before 1/1/87 $3,200 $4,800 $4,800 $4,800
1/1/87 To 12/31/88 $2,560 $4,100 $2,450 $1,475
1/1/89 To 12/31/90 $2,660 $4,200 $2,550 $1,475
1/31/91 To 12/31/91 $2,660 $4,300 $2,550 $1,575
1/31/92 To 12/31/92 $2,760 $4,400 $2,650 $1,575
1/1/93 To 12/31/93 $2,860 $4,600 $2,750 $1,675
1/1/94 To 12/31/94 $2,960 $4,700 $2,850 $1,675
1/1/95 To 12/31/95 $3,060 $4,900 $2,950 $1,775
1/1/96 To 12/31/96 $3,060 $4,900 $2,950 $1,775
1/1/97 To 12/31/97 $3,160 $5,000 $3,050 $1,775
1/1/98 To 12/31/98 $3,160 $5,000 $2,950 $1,775
1/1/99 To 12/31/99 $3,060 $5,000 $2,950 $1,775
1/1/00 To 12/31/00 $3,060 $4,900 $2,950 $1,775
1/1/01 To 12/31/01 $3,060 $4,900 $2,950 $1,775
9/11/01 To 5/5/03 $7,660 $4,900 $2,950 $1,775
5/6/03 To 12/31/03 $10,710 $4,900 $2,950 $1,775
1/1/04 To 12/31/04 $10,610 $4,800 $2,850 $1,675
1/1/05 To 12/31/05 $2,960 $4,700 $2,850 $1,675
1/1/06 To 12/31/06 $2,960 $4,800 $2,850 $1,775
1/1/07 To 12/31/07 $3,060 $4,900 $2,850 $1,775
1/1/08 To 12/31/08 $10,960 $4,800 $2,850 $1,775
1/1/09 To 12/31/09 $10,960 $4,800 $2,850 $1,775
1/1/10 To 12/31/10 $11,060 $4,900 $2,950 $1,775
1/1/11 To 12/31/11 $11,060 $4,900 $2,950 $1,775
1/1/12 To 12/31/12 $11,160 $5,100 $3,050 $1,875
1/1/13 To 12/31/13 $11,160 $5,100 $3,050 $1,875
1/1/14 to 12/31/14 $3,160 $5,100 $3,050 $1,875
1/1/15 To 12/31/15 $11,160 $5,100 $3,050 $1,875
1/1/16 To 12/31/16 $11,160 $5,100 $3,050 $1,875
1/1/17 To 12/31/17 $11,160 $5,100 $3,050 $1,875
1/1/18 To 12/31/18 $9,560 $5,100 $3,050 $1,875
1/1/19 To 12/31/19 $7,960 $5,100 $3,050 $1,875

 

 

 

 

  1. 179 First-Year Expensing (Not applicable to Estates and Trusts)-
    Section 179 allows a taxpayer to expense the cost of qualified assets (tangible personal property) in the year of acquisition rather than capitalizing and depreciating them. The maximum Section 179 allowance is shown below in the table. The maximum dollar limitation shown below is reduced one dollar for every dollar of Section 179 property placed in service during the year in excess the amount shown in the third column.

    Tangible personal property (such as stoves, refrigerators, washing machines, etc.) used in a residential rental building (for example: an apartment building, or rental home) does NOT qualify for Section 179 first-year expensing.

    For SUV's with loaded weights between 6,000 and 14,000 pounds that are put into service after October 22, 2004, the maximum Section 179 deduction is $25,000.

    Section 179 does NOT apply to estates and trusts.

    Section 179 is available for off-the-shelf computer software placed in service in tax years beginning in years 2003 through 2013.




Tax Year Begins in



Maximum Sec 179
Reduce Sec 179 By $1
For Every $1 of Assets
Acquired During the Year
Over This Amount
1987 To 1982 $10,000 $200,000
1993 To 1996 $17,500 $200,000
1997 $18,000 $200,000
1998 $18,500 $200,000
1999 $19,000 $200,000
2000 $20,000 $200,000
2001 $24,000 $200,000
2002 $24,000 $200,000
2003 $100,000 $400,000
2004 $102,000 $410,000
2005 $105,000 $420,000
2006 $108,000 $430,000
2007 $125,000 $500,000
2008 - 2009 $250,000 $800,000
2010 - 2011 $500,000 $2,000,000
2012 - 2015 $500,000 $2,000,000

2016

$500,000

$2,010,000

2017 $510,000 $2,030000

 

  1. Leasehold Improvements -
    The 2004 JOBS act provides a temporary statutory 15-year recovery period for qualified leasehold improvements placed in service after 10/24/2004 and before 1/1/2012. The American Tax Relief Act of 2012 extended this provision through 12/31/2013.The provision requires that qualified leasehold improvement property be recovered using the straight-line method. Qualified leasehold improvements are eligible for the first-year bonus depreciation allowance. Qualified leasehold improvements are any improvement to the interior portion of a building that is nonresidential real property. The improvement must be made under or pursuant to a lease either by the lessee (or sublessee), or by the lessor, of that portion of the building to be occupied exclusively by the lessee (or sublessee). The lessor and lessee cannot be related parties. The improvement must be placed in service more than three years after the date the building was first placed in service. Qualified leasehold improvement property does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, or structural component benefiting a common area, or the internal structural framework of the building.

  2. Amortization IRC Codes:
    Lease Acquisition Costs IRC Code Section 178
    Software IRC Code Section 167
    Loan Acquisition Costs IRC Code Section 461
    Intangibles (Goodwill, Etc) IRC Code Section 197
    Business Start-Up Expenditures IRC Code Section 195
    Organizational Expenditures For a Corporation IRC Code Section 248
    Organizational Expenditures For a Partnership IRC Code Section 709
    Optional Write-Off of Tax Preferences IRC Code Section 59
    Qualified Revitalization Expenditures IRC Code Section 1400
    Pollution Control Facilities IRC Code Section 169
    Certain Bond Premiums IRC Code Section 171
    Research & Experimental Expenditures IRC Code Section 174
    Qualified Forestation & Reforestation Costs IRC Code Section 194
    Points IRC Code Section 461

     

     
  3.  Qualified Improvement Property - The PATH Act created a new category of qualified real property that is eligible for bonus depreciation. Qualified Improvement Property is any improvement to an interior protion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed into service.