What Is MACRS Depreciation and How Does It Work?

MACRS depreciation, short for the Modified Accelerated Cost Recovery System, is the federal tax method used to deduct the cost of most business property placed in service after 1986. Instead of writing off an asset all at once, you recover its cost through annual deductions spread over a recovery period the IRS assigns to that type of property, with larger deductions in the early years. Congress created the system in the Tax Reform Act of 1986 to replace the earlier Accelerated Cost Recovery System.¹

What Property Qualifies

Three conditions have to be met: you own the asset, you use it in a business or income-producing activity, and it has a useful life longer than one year.² Tangible property like machinery, vehicles, office equipment, and buildings generally qualifies. Intangible assets such as patents and copyrights are amortized under separate rules and don’t fall under MACRS.

Land is the big exclusion. It doesn’t wear out, become obsolete, or get used up, so you can’t depreciate it.³ When you buy real estate, you have to split the purchase between land and structure and only depreciate the structure. Certain land preparation costs tied closely to depreciable property can qualify separately. Motion picture films, video and sound recordings, and some public utility property are also excluded.²

Property Classes and Recovery Periods

The IRS sorts depreciable assets into classes, and each class has a fixed recovery period. The physical lifespan of your particular asset doesn’t matter; you use the period assigned to its class.³ The main classes under the General Depreciation System:

3-year: over-the-road tractor units and certain manufacturing tools.
5-year: automobiles, trucks, buses, computers, copiers, and qualified technological equipment.
7-year: office furniture and fixtures such as desks, filing cabinets, and safes.
10-year: water transportation equipment, single-purpose agricultural structures, and fruit or nut-bearing trees and vines.
15-year: land improvements like fences, roads, sidewalks, shrubbery, and bridges; municipal wastewater treatment plants; telephone distribution plant; and qualified improvement property placed in service after 2017.
20-year: certain municipal sewers and farm buildings.
25-year: water utility property.
27.5-year: residential rental buildings.
39-year: nonresidential (commercial) real property.

Qualified improvement property covers interior improvements to nonresidential buildings that don’t enlarge the building or affect its structural framework. It sits in the 15-year class, so those improvements recover much faster than the 39-year building itself.³

General Depreciation System vs. Alternative Depreciation System

MACRS has two subsystems. Most businesses use the General Depreciation System (GDS) because it allows accelerated methods and shorter periods, producing larger deductions early on.⁴ The Alternative Depreciation System (ADS) uses straight-line depreciation over longer periods.

ADS is mandatory for certain property, including property used predominantly outside the United States, tax-exempt use property, tax-exempt bond-financed property, certain farming property held by an electing farming business with a recovery period of 10 years or more, and property held by an electing real property trade or business under the business interest limitation rules.² You can also elect ADS voluntarily for any class of property, but the election is irrevocable for that class and tax year.

Depreciation Methods and Conventions

Under GDS you pick from three methods. The 200% declining balance method front-loads the biggest deductions. The 150% declining balance method is a milder version of the same idea. Straight-line spreads the deduction evenly across the recovery period. With either declining balance method, you automatically switch to straight-line in the first year that would produce an equal or larger deduction.⁴ ADS is straight-line only.

MACRS also uses conventions that decide when the recovery period is treated as starting, regardless of the actual in-service date:

Half-year convention: all personal property placed in service during the year is treated as placed in service at the midpoint. This is the default.
Mid-quarter convention: replaces the half-year rule when more than 40% of your total depreciable personal property basis for the year lands in the last three months. Real property and railroad gradings don’t count toward that 40%.⁵
Mid-month convention: applies to residential rental and nonresidential real property, based on the specific month the building was placed in service.

The mid-quarter rule exists to keep businesses from buying a truckload of equipment in December and claiming a full half-year of depreciation on it. If you’re planning year-end purchases, track that 40% figure.

How to Calculate and Claim the Deduction

Computing a MACRS deduction takes five inputs:

Cost basis: what you paid, plus sales tax, freight, installation, and other capitalized costs.⁶
Date placed in service: the date the asset was ready and available for use.
Property class: the assigned recovery period.
Method: 200% declining balance, 150% declining balance, or straight-line.
Convention: half-year, mid-quarter, or mid-month.

If you claimed Section 179 or bonus depreciation on the asset, reduce basis by those amounts first. If you received an investment tax credit, reduce basis by the credit; for energy credits and clean electricity investment credits, only 50% of the credit reduces basis.⁷

The simplest way to run the numbers is to look up the applicable percentage in the IRS tables in the Form 4562 instructions and Publication 946, then multiply your remaining basis by that percentage for the relevant year.⁸

All depreciation gets reported on Form 4562, Depreciation and Amortization, covering both new assets and property still being depreciated from earlier years. The total flows to your income tax return: Schedule C for sole proprietors, Form 1120 for C corporations, or Form 1065 for partnerships (which pass the deduction through on Schedule K-1).⁸

Combining MACRS With Section 179 and Bonus Depreciation

MACRS isn’t the only way to recover an asset’s cost, and many taxpayers combine methods on the same purchase. Section 179 lets you deduct the full cost of qualifying property in the year you place it in service, subject to annual dollar limits. For tax years beginning in 2026, the maximum Section 179 deduction is $2,560,000, with a phase-out starting once qualifying property placed in service exceeds $4,090,000 and full elimination at $6,650,000. Unlike MACRS, the Section 179 deduction cannot exceed your taxable income from active business operations; any excess carries forward.

Bonus depreciation, formally the “special depreciation allowance,” lets you deduct a large percentage of a qualifying asset’s cost in year one on top of any Section 179 amount. The Tax Cuts and Jobs Act originally set it at 100% but scheduled a phase-down starting in 2023. The One, Big, Beautiful Bill Act then restored 100% bonus depreciation for qualifying property acquired after January 19, 2025.⁹ To qualify, property must be new to you (original use begins with you) or meet specific acquisition requirements, and it must have a recovery period of 20 years or less under MACRS. Qualified improvement property also qualifies.¹⁰

For calendar-year taxpayers who placed property in service during 2025, the law allowed an election to use a reduced 40% rate (or 60% for certain long-production-period property and aircraft) rather than 100%.² Starting in 2026, 100% applies without a phase-down election.

When all three apply, use them in order: Section 179 first, then bonus depreciation on what’s left, then regular MACRS on whatever basis remains.³

State tax rules are a separate matter. Many states don’t follow federal bonus depreciation and require you to add back part or all of the federal deduction on your state return, then depreciate over the full recovery period for state purposes. Check your state’s conformity rules before assuming the federal treatment carries over.

Vehicles and Listed Property

Passenger vehicles used for business face annual caps on total depreciation, including any Section 179 and bonus amounts. These Section 280F caps are adjusted yearly for inflation. For vehicles placed in service in 2025, the first-year limit was $12,200, or $20,200 with bonus depreciation.⁸ If you use the vehicle partly for personal reasons, reduce the cap by your personal-use percentage.

Heavier vehicles fare differently. SUVs and trucks with a gross vehicle weight rating above 6,000 pounds escape the passenger-auto caps, but SUVs between 6,000 and 14,000 pounds face a separate Section 179 limit of roughly $32,000 for 2026. Vehicles above 14,000 pounds are generally eligible for full Section 179 expensing without that SUV cap.

Vehicles are one example of “listed property,” a category of assets that commonly serve both business and personal purposes. Listed property has extra recordkeeping demands and a critical threshold at 50% business use. If business use drops to 50% or below in any year after you place the asset in service, three things happen:³

You must switch to straight-line depreciation over the ADS recovery period for that year and all remaining years.
You must recapture excess depreciation, meaning the difference between what you actually deducted using an accelerated method in earlier years and what ADS straight-line would have given you. The excess is ordinary income.
You increase the asset’s basis by the recaptured amount.

Keep contemporaneous logs of dates, mileage, and business purpose. Without adequate records, the IRS can disallow the depreciation entirely.

What Happens When You Sell the Asset

Depreciation reduces basis, and when you sell, the gain attributable to prior depreciation gets recaptured at rates that can exceed the long-term capital gains rate. The mechanics depend on whether the asset is personal property or real property.

Personal Property Under Section 1245

On the sale of equipment, vehicles, machinery, and similar assets, gain up to the total depreciation you previously took is taxed as ordinary income. Only gain above the original cost qualifies for long-term capital gains rates.¹¹ Most personal property sells for less than original cost, so the entire gain is usually ordinary income.

Real Property Under Section 1250

Buildings depreciated under MACRS use straight-line, so there is typically no excess depreciation to recapture as ordinary income under Section 1250.¹² The gain attributable to that straight-line depreciation is instead taxed as “unrecaptured Section 1250 gain” at a maximum rate of 25%, higher than the 15% or 20% standard long-term capital gains rate.¹³ Any remaining gain above original cost falls under regular capital gains rates.

Report the sale and compute the recapture on Form 4797, Sales of Business Property. Part III walks through the calculation, and the results flow to your main return.¹⁴

Fixing Missed or Incorrect Depreciation

If you never claimed depreciation on an asset, or used the wrong method or recovery period, you generally can’t fix it by amending old returns. The correction goes on Form 3115, Application for Change in Accounting Method, filed with your current-year return.¹⁵

Form 3115 triggers a Section 481(a) adjustment that catches everything up. If you underclaimed, the adjustment is negative and you take the full missed amount as a deduction in the year of change. If you overclaimed, the positive adjustment spreads over four years. The automatic change procedure for moving from an impermissible to a permissible depreciation method doesn’t carry a user fee, which makes this a workable route for cleaning up past mistakes.

1
Legal Information Institute (LII) / Cornell Law School. MACRS
2
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
3
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
4
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property – Section: Figuring Depreciation Under MACRS
5
eCFR. 26 CFR 1.168(d)-1 – Applicable Conventions, Half-Year and Mid-Quarter Conventions
6
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
7
Office of the Law Revision Counsel. 26 USC 50 – Other Special Rules
8
Internal Revenue Service. Instructions for Form 4562, Depreciation and Amortization
9
Internal Revenue Service. One, Big, Beautiful Bill Provisions
10
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
11
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
12
Office of the Law Revision Counsel. 26 USC 1250 – Gain From Dispositions of Certain Depreciable Realty
13
eCFR. 26 CFR 1.453-12 – Allocation of Unrecaptured Section 1250 Gain
14
Internal Revenue Service. 2025 Instructions for Form 4797, Sales of Business Property
15
Internal Revenue Service. Instructions for Form 3115, Application for Change in Accounting Method