The Modified Accelerated Cost Recovery System, known as MACRS, is the depreciation framework under 26 USC 168 that businesses use to write off the cost of buildings, equipment, vehicles, and other long-lived assets over set recovery periods. Instead of asking each taxpayer to estimate how long an asset will last, MACRS assigns it to a class, prescribes a calculation method, and applies an averaging convention that determines first- and last-year deductions. Bonus depreciation and Section 179 sit on top of that structure and let qualifying property be written off immediately.
What Qualifies for MACRS Depreciation
Depreciable property has to be used in a trade or business or held to produce income, have a determinable useful life longer than one year, and wear out or become obsolete over time. Land, inventory, and personal-use assets fall outside the system. Land improvements such as parking lots, fences, and sidewalks are depreciable even though the land beneath them is not.
Mixed-use property gets prorated. A laptop used 70% for business generates depreciation on 70% of its cost, and the IRS treats the business-use percentage as a frequent audit target, so keep records of how you calculated the split.1Internal Revenue Service. Topic No. 704, Depreciation
Listed property, chiefly passenger automobiles, is watched more closely because of its personal-use potential. To use accelerated depreciation on listed property you need business use above 50%. If business use drops to 50% or below, you lose accelerated methods and switch to straight-line under the longer Alternative Depreciation System recovery period. Computers were removed from the listed property category by the Tax Cuts and Jobs Act in 2017.
Passenger vehicles also face annual dollar caps regardless of the method chosen. For vehicles placed in service in 2026, the first-year cap is $20,300 with bonus depreciation or $12,300 without, then $19,800 in year two, $11,900 in year three, and $7,160 in each year after that.2Internal Revenue Service. Rev. Proc. 2026-15 – Depreciation Limitations for Passenger Automobiles You calculate depreciation first and then compare it to the cap.
Recovery Periods by Class
MACRS sorts tangible personal property into classes of 3, 5, 7, 10, 15, or 20 years. Real property gets 27.5 years if it is residential rental (at least 80% of gross rental income from dwelling units) and 39 years if nonresidential.3Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System The IRS spells out the specific class assignments in Revenue Procedure 87-56 and Publication 946.
- 3-year property: certain manufacturing tools, racehorses over two years old, and assets with an ADR midpoint of four years or less.
- 5-year property: computers, peripheral equipment, automobiles, light trucks, office machinery, and most research equipment.
- 7-year property: office furniture, fixtures, agricultural machinery, and any tangible personal property not assigned to another class.
- 15-year property: land improvements (fences, roads, sidewalks, landscaping), qualified improvement property, and certain utility property.
- 20-year property: farm buildings and municipal sewers placed in service after 2017.
The seven-year class is the default bucket. If an asset does not clearly belong elsewhere, it lands there. Qualified improvement property, which covers interior improvements to nonresidential buildings made after they are placed in service (excluding enlargements, elevators, escalators, and changes to the internal structural framework), carries a 15-year recovery period and is eligible for bonus depreciation.3Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
Cost segregation studies sometimes reclassify components of a building, such as electrical systems, specialized flooring, and certain fixtures, into shorter classes than the 39-year building itself. That reclassification front-loads deductions.
How Deductions Are Calculated
Once an asset is in a class, the method determines how the deduction is spread across the recovery period.
Declining Balance
Most tangible personal property defaults to the 200% declining balance method. That doubles the straight-line rate and applies it to the asset’s remaining undepreciated balance each year. A five-year asset gets a 40% rate (twice the 20% straight-line rate) applied to the declining balance, producing large early deductions that shrink over time. MACRS automatically switches to straight-line in the year that yields a larger deduction, so the full cost is recovered by the end of the class life. The 15-year and 20-year classes use 150% declining balance instead, which is somewhat less front-loaded.
Straight-Line
Straight-line divides cost evenly across the recovery period. It is required for all real property and for anything depreciated under ADS. A $390,000 nonresidential building generates roughly $10,000 per year. You can also elect straight-line for a personal property class while keeping the standard MACRS recovery periods, which gives you slower deductions than declining balance but faster than ADS. Once elected for a class of assets placed in service in a given year, straight-line is irrevocable for those assets.
Averaging Conventions
MACRS does not track the exact date an asset went into service. It uses averaging conventions that assume a standardized placement date.
- Half-year convention: the default for tangible personal property. Every asset is treated as placed in service at the midpoint of the year, so you get half a year of depreciation in year one and half a year in the final year.
- Mid-quarter convention: mandatory when more than 40% of the total basis of personal property placed in service during the year is added in the last three months. Assets are treated as placed in service at the midpoint of the quarter they were actually acquired, which typically reduces first-year deductions on late-year purchases. Real property is excluded from the 40% test.4eCFR. 26 CFR 1.168(d)-1 – Half-Year and Mid-Quarter Conventions
- Mid-month convention: required for all real property. The building is treated as placed in service in the middle of the month it enters service.
The mid-quarter rule catches businesses that stack equipment purchases into December. Buy a $200,000 machine in March and a $500,000 machine in November and the November purchase alone exceeds 40% of the year’s placed-in-service basis, forcing mid-quarter on everything personal placed in service that year. Timing major purchases around the 40% threshold can move first-year deductions materially.
Bonus Depreciation
Bonus depreciation under Section 168(k) lets a business write off the full cost of qualifying property in the year it enters service. As of 2026, qualifying property is eligible for 100% bonus depreciation with no dollar cap. The One Big Beautiful Bill Act, signed in 2025, permanently restored 100% bonus depreciation for qualifying property acquired after January 19, 2025, with no sunset and no further phase-down.
To qualify, property must have a MACRS recovery period of 20 years or less. That takes in most equipment, machinery, computers, vehicles (subject to the passenger auto caps), and qualified improvement property. Property depreciated under ADS does not qualify. Bonus depreciation applies automatically to all qualifying property in a class unless you elect out on a timely filed return.
Used property qualifies as long as you did not use it before acquiring it, you did not buy it from a related party, and your cost basis is not determined by reference to the seller’s basis.5Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ Property inherited from a decedent does not qualify. Anti-churning rules in the code separately block accelerated depreciation on property acquired from a related party or in a carryover-basis transaction, and those rules apply at the entity level for partnerships and S corporations.
Section 179 Expensing
Section 179 also allows immediate expensing but works differently from bonus depreciation.6Office of the Law Revision Counsel. 26 U.S. Code 179 – Election to Expense Certain Depreciable Business Assets The key contrasts:
- Dollar cap: Section 179 has an annual maximum deduction (set at $1,000,000 by statute and adjusted for inflation) and phases out dollar-for-dollar once qualifying property placed in service exceeds a threshold set at $2,500,000 and also inflation-adjusted. Bonus depreciation has no cap.
- Taxable income limit: Section 179 cannot exceed taxable income from active trades or businesses and cannot create or increase a net operating loss. Bonus depreciation can create an NOL that carries forward.7Office of the Law Revision Counsel. 26 U.S. Code 172 – Net Operating Loss Deduction
- Elective vs. automatic: Section 179 is a property-by-property election. Bonus depreciation is automatic unless you elect out.
- Real property: Section 179 reaches certain nonresidential improvements (roofs, HVAC, fire protection, security systems). Bonus depreciation reaches qualified improvement property more broadly.
Many businesses use both. Section 179 applies first and bonus depreciation picks up whatever depreciable basis remains.
Elections That Change the Default
Section 168 offers several elections. Each applies to all property in the same class placed in service during the same tax year, so you cannot cherry-pick within a class, and each is irrevocable for the assets it covers.
Electing out of bonus depreciation. A business expecting higher effective rates in future years may prefer to spread deductions rather than take 100% in year one. The election must be made on a timely filed return, extensions included, and applies class-wide.
Electing ADS. The Alternative Depreciation System uses straight-line over generally longer recovery periods. Some taxpayers must use ADS: those with tax-exempt bond financing, certain farming operations that elected out of the business interest limitation, and property used predominantly outside the United States. Others elect it voluntarily to smooth income or to line up with corporate earnings and profits calculations.
Electing straight-line under GDS. This keeps the standard MACRS recovery periods but replaces declining balance with straight-line for a whole class.
What Happens When You Sell
Depreciation reduces basis, so more of the sale price shows up as gain. Recapture rules decide how that gain is taxed.
For tangible personal property, Section 1245 treats gain as ordinary income up to the amount of depreciation previously claimed.8Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property Buy equipment for $100,000, take $60,000 in depreciation, sell for $80,000, and the $40,000 gain is ordinary because it sits inside the $60,000 of prior depreciation. This holds regardless of the method used.
Real property runs on Section 1250. Buildings depreciated straight-line, which is what current law requires, are generally not subject to Section 1250 recapture. But the portion of the gain attributable to depreciation, called unrecaptured Section 1250 gain, is taxed at a maximum rate of 25% rather than the lower long-term capital gains rate that applies to the rest.
Two strategies defer the hit. A like-kind exchange under Section 1031 swaps one real property for another and defers both the gain and the recapture; since 2018, Section 1031 applies only to real property, so equipment and vehicles are out.9Office of the Law Revision Counsel. 26 U.S. Code 1031 – Exchange of Real Property Held for Productive Use or Investment10Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips An installment sale under Section 453 spreads gain across the years payments are received.
Fixing Depreciation Errors
If you have been using the wrong class, the wrong method, or missing depreciation entirely, you do not fix it by amending prior returns. The IRS requires a change in accounting method on Form 3115.11Internal Revenue Service. Instructions for Form 3115, Application for Change in Accounting Method
The mechanism is a Section 481(a) adjustment: a one-time catch-up for the cumulative difference between what you deducted and what you should have deducted. Underclaimed depreciation comes back as a deduction in the year Form 3115 is filed. Overclaimed depreciation gets added back. Most depreciation corrections qualify for the automatic consent procedures, so no pre-approval is required and no user fee applies.
This is how a cost segregation study normally lands. A building that has been depreciated over 39 years may have 20% to 30% of its cost properly assigned to 5-year, 7-year, or 15-year components. The Section 481(a) adjustment captures the missed accelerated depreciation in a single year without disturbing any prior return.