How 150% Declining Balance Depreciation Works: Rules and Elections

The 150% declining balance depreciation method applies a rate equal to 1.5 times the straight-line rate to an asset’s declining adjusted basis each year, and under MACRS it is mandatory for 15-year and 20-year property, qualified smart electric meters, and qualified smart electric grid systems. For shorter-lived property classes that would otherwise use the faster 200% method, you can elect 150% voluntarily. The calculation runs each year on the remaining basis, ignores salvage value, and switches to straight-line in the first year that produces a larger deduction.

When the 150% Method Is Required

Internal Revenue Code Section 168(b)(2) names three categories where 150% declining balance replaces the default 200% rate under the General Depreciation System.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: time-based meters and related communication equipment used by an electric energy supplier, provided the property has a class life of at least 16 years.
Qualified smart electric grid systems: electronics and monitoring equipment used for electric distribution grid communications and management by energy suppliers, again with a class life of at least 16 years.

The common shorthand that land improvements like sidewalks and fences sit in the 15-year class is generally accurate under IRS depreciation tables, but the statute itself defines 15-year property by specific functional categories rather than a blanket “land improvements” label.¹

Electing 150% for Shorter-Lived Property

When the method isn’t required, you can still elect it for any property class that would otherwise use 200% declining balance. In practice, the election is available for 3-year, 5-year, 7-year, and 10-year property under GDS, since those are the classes where 200% is the default.¹

Two constraints apply. The election covers an entire property class for the tax year, so you can’t cherry-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.¹

The usual reason to choose the slower method is income timing. A business expecting low taxable income in the current year but higher income later may prefer to shift deductions forward rather than waste large early-year deductions against little or no income. The 150% method still front-loads deductions compared with straight-line, just less aggressively than 200%.

How to Calculate 150% Declining Balance

The math is straightforward once you know the inputs. Divide one by the asset’s MACRS recovery period to get the straight-line rate. Multiply by 1.5 to get the 150% declining balance rate. Apply that rate each year to the asset’s remaining adjusted basis rather than its original cost.

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 each year, the annual deduction naturally declines over time. The MACRS calculation ignores salvage value entirely, so the basis depreciates down to zero over the full recovery period.

The Mandatory Switch to Straight-Line

At some point during the recovery period, 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 adjusted basis yields the larger deduction.¹

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. The straight-line deduction would be $46,000 ÷ 5.5 = $8,364. The 150% declining balance deduction for that year ($46,000 × 15% = $6,900) is smaller, so you switch and claim $8,364. The switch is automatic. No separate election is required.

Half-Year and Mid-Quarter Conventions

The convention determines how much depreciation you claim in the first and last year of the recovery period. 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 you actually started using it. That’s why the Year 1 figure above was 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 this threshold is triggered, each asset is treated as placed in service at the midpoint of the quarter it was actually placed in service. The calculation excludes residential rental property, nonresidential real property, railroad grading or tunnel bores, and property placed in service and disposed of in the same year.²

The mid-quarter convention reduces the first-year deduction for fourth-quarter purchases, which is the point of the rule. If you’re planning significant equipment purchases near year-end, run the 40% test before you finalize timing.

How It Compares to 200% Declining Balance and Straight-Line

Three depreciation methods cover the vast majority of MACRS property, and the total amount depreciated over the full recovery period is identical under all three. Only the timing differs.

200% declining balance uses twice the straight-line rate and produces the largest early-year deductions. It is the default for 3-year through 10-year property.
150% declining balance uses 1.5 times the straight-line rate. Early deductions are smaller than 200% but larger than straight-line. It is required for 15-year and 20-year property and available by election for shorter classes.
Straight-line gives equal deductions each full year over the recovery period, adjusted for the applicable convention in the first and last years. It is required for real property and ADS property and available by election for any class.

The practical difference narrows as the recovery period lengthens. On a 20-year asset, the Year 1 gap between 150% declining balance and straight-line is modest compared with the gap between 200% and straight-line on a 5-year asset.

What 150% Declining Balance Does Not Apply To

A persistent misconception holds that the Alternative Depreciation System requires the 150% declining balance method for personal property. It does not. ADS uses the straight-line method without regard to salvage value, applied over longer ADS recovery periods and the applicable convention.¹ When ADS applies, which it must for assets used predominantly outside the United States, property financed with tax-exempt bonds, and certain property of tax-exempt organizations, depreciation is straight-line from day one regardless of recovery period.

Farming property is another area where the rule has changed. Before the Tax Cuts and Jobs Act, farmers had to use 150% declining balance for virtually all personal property used in a farming business. For farm property placed in service after December 31, 2017, that requirement was removed for 3-year, 5-year, 7-year, and 10-year property, and farmers can now use 200% declining balance for those shorter-lived asset classes.²³

Interaction With Bonus Depreciation

Bonus depreciation under Section 168(k) is claimed before regular MACRS depreciation, including the 150% method. A high bonus percentage reduces the remaining depreciable basis substantially, so 150% declining balance then applies to a much smaller amount. The regular MACRS method still governs whatever basis remains after the bonus deduction, and it still governs any property that doesn’t qualify for bonus depreciation at all.

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