How 150% Declining Balance Depreciation Works: Rules and Elections

The 150% declining balance depreciation method is a MACRS calculation that writes off an asset at 1.5 times its straight-line rate, applied each year to the remaining adjusted basis rather than to original cost. It’s required for 15-year and 20-year property under the General Depreciation System, along with qualified smart electric meters and smart electric grid systems. For shorter-lived property that would otherwise use the faster 200% method, taxpayers can elect 150% voluntarily.

When the 150% Method Is Required

Internal Revenue Code Section 168(b)(2) identifies three categories of property where 150% declining balance replaces the default 200% rate.¹

Any property assigned a 15-year or 20-year recovery period under GDS that isn’t otherwise required to use straight-line. The 15-year class includes items such as municipal wastewater treatment plants, retail motor fuels outlets, natural gas distribution lines, and qualified improvement property. The 20-year class covers initial clearing and grading improvements for electric utility transmission and distribution plants.
Qualified smart electric meters and related communication equipment used by an electric energy supplier, if the property has a class life of at least 16 years.
Qualified smart electric grid systems used for distribution grid communications and management, again with a class life of at least 16 years.

The common shorthand that “land improvements like sidewalks and fences” fall into the 15-year class tracks the IRS depreciation tables in practice, but the statute defines 15-year property by specific functional categories rather than a blanket label.

Electing 150% for Shorter-Lived Property

Even when the method isn’t required, you can elect it for any property class that would otherwise use 200% declining balance. In practice that means 3-year, 5-year, 7-year, and 10-year property under GDS.¹

Two constraints apply. The election covers an entire property class for the tax year, so you cannot pick individual assets within a class; if you elect 150% for 7-year property, every 7-year asset placed in service that year uses 150%. And once made, the election is irrevocable.

Why choose a slower method on purpose? The usual reason is income timing. A business expecting low taxable income this year but higher income later may not want to burn large deductions against little income. The 150% method still front-loads deductions compared to straight-line, just less aggressively than 200%. It splits the difference.

How the Calculation Works

The math is straightforward. Take the straight-line rate (one divided by the recovery period), multiply by 1.5, and apply that rate each year to the asset’s remaining adjusted basis. MACRS ignores salvage value, so the basis depreciates down to zero over the full recovery period.

For a $100,000 asset with a 10-year recovery period:

Straight-line rate: 1 ÷ 10 = 10%
150% declining balance rate: 10% × 1.5 = 15%
Year 1 deduction (half-year convention): $100,000 × 15% × 0.5 = $7,500
Year 2 deduction: $92,500 × 15% = $13,875
Year 3 deduction: $78,625 × 15% = $11,794

Because the rate applies to a shrinking balance, the annual deduction naturally declines each year.

The Mandatory Switch to Straight-Line

At some point the declining balance calculation produces a smaller deduction than dividing the remaining basis evenly over the remaining years. When that crossover happens, you must switch to straight-line for the rest of the recovery period. The statute requires the switch in the first year where straight-line on the remaining basis yields a larger deduction.¹ The switch is automatic; no separate election is needed.

Continuing the 10-year example, suppose by Year 6 the remaining basis is $46,000 with 5.5 years left after accounting for the half-year convention. Straight-line would give $46,000 ÷ 5.5 = $8,364. If the 150% calculation for that year ($46,000 × 15% = $6,900) is smaller, you switch and claim $8,364.

Half-Year and Mid-Quarter Conventions

The convention determines first- and last-year depreciation. Most personal property uses the half-year convention, which treats the asset as placed in service at the midpoint of the year regardless of when use actually started. That is why the Year 1 calculation above multiplied by 0.5.

The half-year convention is overridden by the mid-quarter convention if more than 40% of the total depreciable basis of MACRS property placed in service during the year is placed in service during the last three months.¹ When that triggers, each asset is treated as placed in service at the midpoint of the quarter it was actually placed in service. That reduces the first-year deduction for fourth-quarter purchases to 1.5 months of depreciation instead of six. If you’re planning significant equipment purchases near year-end, run the 40% test before you finalize timing.²

150% vs. 200% Declining Balance and Straight-Line

Three methods cover most MACRS property. Total depreciation over the full recovery period is identical under all three; only the timing differs.

200% declining balance: the most aggressive acceleration, at double the straight-line rate. Default for 3-year through 10-year property.
150% declining balance: moderate acceleration at 1.5 times the straight-line rate. Required for 15- and 20-year property; available by election for shorter classes.
Straight-line: no acceleration. Equal deductions each full year, adjusted for the applicable convention in the first and last years. Required for real property and ADS property; available by election for any class.

The practical difference narrows as recovery periods lengthen. On a 20-year asset, the Year 1 gap between 150% and straight-line is modest compared to the gap between 200% and straight-line on a 5-year asset.

Farming Property: A Rule That Changed in 2018

Before the Tax Cuts and Jobs Act, farmers were required to use 150% declining balance for virtually all personal property used in a farming business, regardless of recovery period. Farm machinery that would ordinarily qualify for the 200% method had to use 150% instead.

For farm property placed in service after December 31, 2017, that blanket requirement was removed for 3-year, 5-year, 7-year, and 10-year property. Farmers can now use the standard 200% declining balance method for those shorter-lived classes, just like any other business.² The 150% method still applies to 15- and 20-year farm property. Farmers who elected out of the uniform capitalization rules for plants they produce must use the Alternative Depreciation System, which uses straight-line.³

ADS Does Not Use 150% Declining Balance

A persistent misconception holds that the Alternative Depreciation System requires 150% declining balance for personal property. It does not. ADS uses the straight-line method without regard to salvage value, applied over longer ADS recovery periods and using the applicable convention.¹

This matters because ADS is mandatory for several categories, including property used predominantly outside the United States, property financed with tax-exempt bonds, and certain property of tax-exempt organizations. When ADS applies, depreciation is straight-line from day one, regardless of recovery period.

Bonus Depreciation and AMT

Bonus depreciation under Section 168(k) is claimed before regular MACRS depreciation, including the 150% method. When the bonus percentage is high, it cuts the remaining depreciable basis substantially, so the 150% calculation applies to a smaller amount. The choice between 150% and 200% still matters for the residual basis and for property that doesn’t qualify for bonus depreciation.

Before the TCJA, the 150% method played a central role in the Alternative Minimum Tax. Taxpayers who used 200% for regular tax had to recompute depreciation using 150% over the property’s AMT class life, and the difference was a preference item. The TCJA largely eliminated this adjustment for property placed in service after 2017. For pre-2018 assets still being depreciated under the 200% method, the AMT adjustment can continue to apply until those assets are fully depreciated, which is worth reviewing when completing Form 6251.

1
Office of the Law Revision Counsel. 26 US Code 168 – Accelerated Cost Recovery System
2
Internal Revenue Service. Publication 946 – How To Depreciate Property
3
Internal Revenue Service. TCJA Training – Depreciation Provisions