How to Calculate Tax Depreciation (MACRS)

When a business buys equipment, a vehicle or a rental property, the cost usually isn’t deducted all at once. It is depreciated, which means deducted over several years. For US tax returns, most property uses MACRS (the Modified Accelerated Cost Recovery System). This guide explains how MACRS works, which convention applies, and how to calculate the deduction for equipment and for a rental building.

This is general information, not tax advice. Rules and limits change, so confirm details with IRS Publication 946 or a tax professional.

The four pieces of a MACRS calculation

1. Basis: the asset’s cost, plus sales tax, delivery and installation. For a building, exclude the value of the land, because land isn’t depreciated.
2. Recovery period (class): set by the IRS for each type of property.
3. Convention: when the asset is treated as placed in service (half-year, mid-quarter or mid-month).
4. Method: 200% declining balance for most 3, 5, 7 and 10-year property, 150% for 15 and 20-year property, and straight-line for real property.

The IRS publishes percentage tables that combine the method and convention, so in practice you multiply the basis by the percentage for each year.

Common MACRS classes

Class	Typical property
5-year	Cars, light trucks, computers, office equipment
7-year	Office furniture, most machinery and equipment
15-year	Land improvements: fences, roads, parking lots
27.5-year	Residential rental buildings
39-year	Nonresidential (commercial) buildings

Worked example 1: office furniture (7-year, half-year convention)

A business buys $30,000 of office furniture, a 7-year class, and the half-year convention applies.

Tax year	MACRS %	Depreciation
1	14.29%	$4,287
2	24.49%	$7,347
3	17.49%	$5,247
4	12.49%	$3,747
5	8.93%	$2,679
6	8.92%	$2,676
7	8.93%	$2,679
8	4.46%	$1,338

The deductions add up to the full $30,000 over eight tax years. The first and last years are half years because of the convention. The depreciation calculator builds this schedule for any cost and class.

Worked example 2: a rental building (27.5-year, mid-month)

Residential rental buildings are depreciated straight-line over 27.5 years using the mid-month convention, which treats the property as placed in service in the middle of the month.

You buy a rental property for $350,000, and $275,000 of that is the building (the rest is land). It is placed in service in July.

1. Full-year depreciation: 275,000 ÷ 27.5 = $10,000.
2. First year: from mid-July to December is 5.5 months, so 10,000 × 5.5 ÷ 12 = $4,583.33.
3. Following years: $10,000 a year until the basis is recovered.

When you sell, depreciation you took (or could have taken) is generally “recaptured” and taxed, so keep good records.

Choosing the convention

• Half-year: the default for personal property such as equipment and vehicles.
• Mid-quarter: required when more than 40% of a year’s personal property (by basis) is placed in service in the last quarter. Each asset is then treated as placed in service in the middle of its quarter, which can reduce the first-year deduction for late-year purchases.
• Mid-month: used for residential rental and nonresidential real property.

First-year expensing: Section 179 and bonus depreciation

Instead of spreading the cost over the MACRS schedule, many businesses can deduct more in the first year:

• Section 179 lets you expense qualifying property up to an annual limit, as long as you have enough business income.
• Bonus depreciation allows a percentage of the cost to be deducted in year one, with the percentage set by current law.

Both are elective and interact with state tax rules, so run the numbers both ways. A bigger deduction now means smaller deductions later.

Selling an asset: depreciation recapture

Depreciation lowers an asset’s adjusted basis, its cost minus the depreciation you’ve deducted. When you sell, your gain is measured from that lower basis:

adjusted basis = original basis − accumulated depreciation
gain = sale price − adjusted basis

If you sold the $30,000 of furniture after three years for $15,000, you’d have deducted $16,881, leaving an adjusted basis of $13,119, so the gain is $1,881. For equipment, gain up to the depreciation taken is generally taxed as ordinary income (“recapture”). For rental buildings, the depreciation portion of the gain is taxed under separate rules. Plan for this before selling, because it can make a sale more expensive than expected.

Assets used partly for business

If an asset is used for both business and personal purposes, only the business share is depreciated. A $40,000 vehicle used 75% for business has a depreciable basis of $30,000. For listed property such as cars, business use must generally be above 50% to use regular MACRS. Otherwise, a slower straight-line method applies. Keep a mileage log to support the percentage.

Keeping good depreciation records

For each asset, keep:

• The purchase invoice and proof of payment.
• The date it was placed in service and its business-use percentage.
• The class, convention and method you used, and each year’s deduction.
• For buildings, how you split the price between land and building, such as from the property tax assessment.

Good records make it easy to continue the schedule each year, handle a sale correctly, and answer IRS questions.

Book depreciation vs. tax depreciation

MACRS is for tax returns. Financial statements usually use straight-line depreciation over the asset’s realistic useful life, often with a salvage value. Many businesses keep two schedules. The depreciation calculator shows both kinds of methods side by side. To judge whether an asset purchase pays off, look at its return with the ROI calculator and its effect on margins with the profit margin calculator.

Common mistakes

• Depreciating land. Only the building and improvements can be depreciated.
• Leaving costs out of the basis. Sales tax, shipping and installation belong in the basis.
• Using the wrong class. A car is 5-year property, not 7-year. Check Publication 946.
• Ignoring the mid-quarter rule after large year-end purchases.
• Forgetting listed-property limits. Passenger cars and other mixed-use property have annual caps and business-use requirements. If a vehicle is financed, its loan interest is a separate deduction from its depreciation. The car loan calculator shows that interest.

Frequently asked questions

What is MACRS?

The Modified Accelerated Cost Recovery System is the method most US businesses must use to depreciate property on their tax returns. It assigns each asset a recovery period (class) and applies IRS percentages to the cost, ignoring salvage value.

Which MACRS class is my asset?

Common examples are 5-year for cars, light trucks, computers and office equipment, 7-year for office furniture and most machinery, 15-year for land improvements such as fences and parking lots, 27.5-year for residential rental buildings and 39-year for commercial buildings. IRS Publication 946 lists the classes.

What is the half-year convention?

It treats every asset as placed in service halfway through the year, so you get half a year of depreciation in the first year and the remaining half year after the class life ends. That is why 5-year property is depreciated over six tax years.

When does the mid-quarter convention apply?

If more than 40% of the depreciable basis of property you placed in service during the year (excluding real property) was placed in service in the last three months, you must use the mid-quarter convention for that year's property instead of the half-year convention.

Can I deduct the whole cost in year one instead?

Possibly. Section 179 expensing and bonus depreciation can allow a much larger first-year deduction, subject to limits that change by tax year. Check the current IRS rules or ask a tax professional before choosing.