MACRS Depreciation — Modified Accelerated Cost Recovery System and Business Asset Recovery Periods
Every tangible asset used in a trade or business declines in value over time, and the tax code allows businesses to deduct that decline — depreciation — as a business expense. The Modified Accelerated Cost Recovery System (MACRS) under Section 168 is the mandatory method for depreciating most business property placed in service after 1986. MACRS assigns specific "recovery periods" to different types of property — 5 years for cars and computers, 7 years for most machinery and office furniture, 27.5 years for residential rental property, 39 years for commercial buildings — and prescribes an accelerated depreciation method (200% declining balance for most personal property) that front-loads the deductions. The result is that a business can deduct its equipment faster than the equipment actually wears out, generating larger deductions in the early years of ownership. MACRS interacts closely with Section 179 expensing (which allows immediate deduction of asset cost up to $2.5 million in 2026 per OBBBA) and bonus depreciation (100% permanently restored by OBBBA for property placed in service after January 19, 2025) — most businesses first consider whether they can immediately expense an asset before falling back on MACRS.
Current Law (2026)
| Parameter | Value |
|---|---|
| Core statute | 26 U.S.C. § 168 |
| General method | 200% declining balance, switching to straight-line when straight-line gives a larger deduction |
| 15-year and 20-year property | 150% declining balance |
| Real property | Straight-line only (residential rental: 27.5 years; nonresidential: 39 years) |
| Default convention | Half-year (property placed in service at any point in the year treated as placed in service at mid-year) |
| Mid-quarter convention trigger | If more than 40% of depreciable personal property placed in service in the last quarter, mid-quarter convention applies to all personal property that year |
| Real property convention | Mid-month (residential rental, nonresidential real) |
| Bonus depreciation (2026) | 100% first-year bonus depreciation permanently restored by OBBBA for property placed in service after Jan. 19, 2025 |
| Section 179 (2026) | Up to $2.5 million immediate expensing per OBBBA (indexed); phase-out begins at $4 million of property placed in service |
| Alternative Depreciation System (ADS) | Longer recovery periods, straight-line method; required for listed property with ≤50% business use, tax-exempt bond financed property, LIBOR/BEAT provisions, real property with a real estate investor election |
Recovery Periods at a Glance
| Property Class | Recovery Period | Method | Examples |
|---|---|---|---|
| 3-year property | 3 years | 200% DB | Tractor units over-the-road, certain breeding hogs |
| 5-year property | 5 years | 200% DB | Cars, light trucks, computers, office equipment, research equipment, appliances in residential rentals |
| 7-year property | 7 years | 200% DB | Most machinery, office furniture, fixtures — "catch-all" class for property without a statutory class life |
| 10-year property | 10 years | 200% DB | Water transportation equipment, single-purpose agricultural structures |
| 15-year property | 15 years | 150% DB | Land improvements (fences, paving, landscaping), retail motor fuel outlets, restaurant improvements, some leasehold improvements |
| 20-year property | 20 years | 150% DB | Farm buildings, municipal sewers |
| 25-year water utility | 25 years | Straight-line | Water utility property |
| Residential rental | 27.5 years | Straight-line | Buildings where 80%+ of income is from residential dwelling units |
| Nonresidential real | 39 years | Straight-line | Commercial buildings, offices, warehouses |
Legal Authority
- 26 U.S.C. § 168(a) — MACRS applies to the § 167(a) depreciation deduction for all tangible property, using the applicable depreciation method, recovery period, and convention
- 26 U.S.C. § 168(b) — Depreciation method: 200% declining balance for 3-, 5-, 7-, and 10-year property; 150% declining balance for 15- and 20-year property; straight-line for residential rental (27.5 years), nonresidential real (39 years), and property where the taxpayer elects straight-line
- 26 U.S.C. § 168(c) — Recovery periods (table): the applicable recovery period corresponds to the MACRS property class — 3/5/7/10/15/20 years for personal property; 27.5 years for residential rental; 39 years for nonresidential real property; 50 years for railroad grading or tunnel bore
- 26 U.S.C. § 168(d) — Conventions: half-year convention for personal property (except when mid-quarter applies); mid-month convention for residential rental and nonresidential real; mid-quarter convention when 40%+ of personal property is placed in service in the last quarter
- 26 U.S.C. § 168(e) — Property classifications: the statute classifies property by "class life" (from the IRS's Revenue Procedure 87-56 table); property with a class life of 4 years or less is 3-year property; 4–10 years is 5-year property; 10–16 years is 7-year property; and so on; property with no class life and not otherwise classified is 7-year property (the default)
- 26 U.S.C. § 168(g) — Alternative Depreciation System (ADS): certain property must use ADS (longer recovery periods, straight-line): listed property with ≤50% business use, property used outside the U.S., tax-exempt bond financed property; taxpayers may also elect ADS voluntarily for any class of property
How MACRS Works in Practice
The declining balance method: MACRS personal property uses the declining balance method. Take 5-year property (a car): the MACRS rate in Year 1 is 200% / 5 years = 40% × the "half-year convention" adjustment factor. IRS publishes the exact MACRS percentage tables in Revenue Procedure 87-57, so businesses typically look up the applicable percentage rather than computing it.
MACRS 5-year property (car, computer) deduction schedule:
- Year 1: 20% (200% DB, half-year convention)
- Year 2: 32%
- Year 3: 19.2%
- Year 4: 11.52%
- Year 5: 11.52%
- Year 6: 5.76% (remaining basis recovered in the year after the recovery period due to the half-year convention)
MACRS 7-year property (office furniture, machinery):
- Year 1: 14.29%
- Year 2: 24.49%
- Year 3: 17.49%
- Year 4: 12.49%
- Year 5: 8.93%
- Year 6: 8.92%
- Year 7: 8.93%
- Year 8: 4.46% (half-year convention again)
Residential rental property (27.5 years): Use the mid-month convention and straight-line method. A residential rental building placed in service in February has a first-year deduction rate of about 3.485% (10.5/12 months × 1/27.5). Buildings are depreciated over 27.5 years; land is not depreciable.
Interaction with Bonus Depreciation and § 179
Before applying MACRS, most businesses should first consider whether to use Section 179 expensing or bonus depreciation to immediately deduct the asset's full cost (or a larger fraction):
-
Section 179: Allows immediate expensing of the cost of qualifying property up to $2.5 million (2026 per OBBBA), but is limited to the business's taxable income from active conduct of a trade or business. Cannot create a loss. Best used for assets the business wants to fully deduct immediately when there's sufficient taxable income.
-
Bonus depreciation (§ 168(k)): 100% first-year deduction permanently restored by OBBBA for property placed in service after January 19, 2025 (the prior TCJA phase-down to 60% / 40% / 20% / 0% no longer applies). Unlike § 179, bonus depreciation can create a loss.
When neither § 179 nor bonus fully expenses the asset, the remaining basis is depreciated using MACRS.
Listed Property Rules
"Listed property" (§ 280F) — including passenger automobiles, SUVs, computers used in a home office, and entertainment property — is subject to special rules:
- If listed property is used ≤50% for business, it must be depreciated using ADS (the slower alternative system)
- Luxury automobile limitations cap annual depreciation on passenger cars regardless of MACRS rates: the § 280F "luxury auto caps" limit first-year deduction (before bonus) to $12,400 for cars placed in service in 2024; subsequent years have lower caps
- Bonus depreciation on passenger autos is limited — typically $20,000 in the bonus year
Cost Segregation Studies
Commercial buildings are depreciated over 39 years (or 27.5 years for residential rental), but many components of a building qualify as personal property with 5- or 7-year recovery periods: specialized plumbing, electrical for manufacturing equipment, decorative lighting, floor coverings, certain landscaping. A "cost segregation study" is an engineering analysis that identifies the portions of a building or renovation that qualify as shorter-lived personal property, accelerating depreciation. For a $5 million commercial building, a cost segregation study might reclassify $1 million of components as 5-year or 7-year property — generating significantly higher deductions in the early years after purchase.
How It Affects You
If you run a business and buy equipment, vehicles, or machinery: The OBBBA permanently restored 100% bonus depreciation for property placed in service after January 19, 2025 — meaning the prior phase-down schedule (40% in 2025, 20% in 2027, 0% in 2028) no longer applies. For any equipment, machinery, or vehicle placed in service today, your deduction sequence is: (1) Section 179 first (up to $2.5 million per OBBBA, phasing out above $4M in property placed in service), then (2) 100% bonus depreciation on remaining basis, then (3) MACRS on any remainder. For most small businesses buying equipment under $2.5M, the full cost is deductible in year one through § 179 alone. Bonus depreciation differs from § 179 in one key way: it can create a net operating loss that carries forward, while § 179 cannot. Track each purchase with: date placed in service, total cost, property class, and whether § 179 or bonus was taken — you'll need this for recapture calculations if you sell the asset before the end of its recovery period. California, New York, and New Jersey do not conform to bonus depreciation — if you do business in those states, you'll maintain separate state depreciation schedules and face a state add-back of the bonus in year one with recovery over the MACRS period.
If you own rental real estate: Your building depreciates over 27.5 years (residential) or 39 years (commercial) using straight-line — real property is NOT eligible for bonus depreciation regardless of the OBBBA. This means the "paper loss" from MACRS depreciation on buildings remains a long-term, year-by-year deduction. But the components inside a building that qualify as personal property (5-year or 7-year MACRS) ARE bonus-eligible — and a cost segregation study can dramatically increase first-year deductions. For a $2 million commercial building, a cost seg study might reclassify $400,000 of personal property components (specialized electrical, floor coverings, lighting) as 5- or 7-year property. Under 100% bonus depreciation (OBBBA), that $400,000 is fully deductible in year one — generating $148,000 in deductions at 37% that otherwise would have been spread over 5-7 years. Know the depreciation recapture consequence: when you sell, accelerated depreciation is "recaptured" at 25% (§ 1250 recapture), and the 100% bonus depreciation taken on personal property components is recaptured as ordinary income (§ 1245 recapture). Plan accordingly before deciding whether cost segregation plus bonus depreciation is worth it at your expected holding period.
If your large business is subject to the Corporate Alternative Minimum Tax (CAMT) or § 163(j) interest limitations: 100% bonus depreciation creates a larger book-tax difference under CAMT than the old phase-down did. The CAMT applies a 15% minimum tax on adjusted financial statement income (AFSI), which uses book depreciation (typically straight-line over useful life) rather than tax depreciation. If your company takes $10M in bonus depreciation in year one but books only $1M of depreciation, CAMT income is $9M higher than taxable income for CAMT calculation purposes. Model the CAMT exposure before taking maximum bonus depreciation — the § 38 CAMT credit (recoverable in later years when regular tax exceeds CAMT) partially mitigates the timing, but cash flow planning matters. Under § 163(j) business interest expense limitations, whether depreciation is an add-back to ATI (adjusted taxable income) depends on which version of ATI applies; check current regulations for the applicable year's rules.
State Variations
States vary dramatically in their conformity to federal MACRS and bonus depreciation:
- Full conformity states: Follow federal MACRS and accept bonus depreciation deductions
- Partial conformity: Some states (California, New York, New Jersey) conform to MACRS recovery periods but do not allow federal bonus depreciation — requiring state "add-back" of bonus depreciation in the year taken, with future deductions spreading the basis over the MACRS period
- California: Does not conform to bonus depreciation; uses California-specific first-year limits; requires separate federal vs. California depreciation schedules
Businesses with assets in multiple states must track separate depreciation schedules for each non-conforming state — a significant compliance burden for multi-state businesses.
Pending Legislation
100% bonus depreciation has now been permanently restored by OBBBA (Pub. L. 119-21, signed July 4, 2025) for property placed in service after January 19, 2025. The earlier Tax Relief for American Families and Workers Act of 2024 had passed the House but stalled in the Senate; OBBBA accomplished the restoration on a permanent basis.
Recent Developments
The TCJA (2017) introduced 100% bonus depreciation on new and used property through 2022, dramatically reducing the relevance of MACRS for many asset purchases. As bonus depreciation phases down, MACRS is becoming the primary depreciation method again for assets placed in service in 2026 and later. The TCJA also created "qualified improvement property" (QIP) as a new category of 15-year MACRS property — covering interior improvements to nonresidential real property — with a retroactive correction in the 2020 CARES Act that fixed a drafting error that had incorrectly assigned QIP a 39-year recovery period.
- OBBBA restores 100% bonus depreciation (2025): The One Big Beautiful Bill Act, passed in 2025, permanently restored 100% bonus depreciation for property placed in service after January 19, 2025, eliminating the TCJA phase-down schedule (80% in 2023, 60% in 2024, 40% in 2025). This effectively makes MACRS cost recovery periods largely irrelevant again for most short-lived business property — any asset with a recovery period of 20 years or less qualifies for immediate expensing. The permanent restoration removes the prior-law uncertainty that had complicated business investment planning since 2023.
- R&D capitalization remains in effect: Despite repeated congressional attempts to restore immediate Section 174 expensing, the TCJA's requirement to capitalize and amortize research and experimental expenditures over 5 years (15 years for foreign R&D) remained in effect through 2025. The OBBBA restored immediate Section 174 expensing prospectively, but companies that capitalized R&D costs in 2022-2025 face multi-year amortization tails. The interaction between bonus depreciation (for tangible property) and R&D amortization (for intangible development costs) requires careful classification of mixed-purpose expenditures.
- Energy property depreciation and IRA interaction: The Inflation Reduction Act (2022) expanded bonus depreciation eligibility for certain energy property and introduced new direct-pay and transferability provisions for energy tax credits. The OBBBA modified some IRA energy credit provisions, but MACRS recovery periods for solar (5-year), wind (5-year), and other energy property remain unchanged. Businesses investing in energy property in 2025-2026 must navigate the interaction between bonus depreciation, ITC/PTC credits, and the passive activity rules.
- Section 179 expensing limit increased: The OBBBA increased the Section 179 immediate expensing limit to $2.5 million (from $1.16 million in 2024), with the phase-out beginning at $4 million in property placed in service. For small businesses that don't qualify for the full bonus depreciation regime (or have taxable income limitations), the expanded Section 179 cap provides a parallel immediate-expensing pathway. The interaction between Section 179 and bonus depreciation — Section 179 is applied first — requires sequencing decisions for mixed-asset investment years.