MACRS Formula Calculation

You generally use the 200% declining-balance method to depreciate personal property with recovery periods of 3, 5, 7, or 10 years, while you use the 150% declining-balance method for 15- or 20-year property.

Instead of using the 200% declining-balance method for personal property, you can elect to use a slower 150% rate. You can elect to use the 150% rate either over the GDS life, or over the longer ADS life, for property placed in service before 1/1/99. (The change in the recovery period used for this election was due to the IRS Restructuring and Reform Act of 1998.) The election to use the 150% rate can be helpful in eliminating the degree of exposure to the Alternative Minimum Tax (AMT). The declining-balance method switches to straight-line at the point in time that maximizes the deduction (the system does this automatically). Then the system uses a half-year convention to calculate allowed depreciation both in the year of acquisition and in the year of disposal.

MACRS real property has a recovery period of 27.5 years for residential real property and a recovery period of either 31.5 years or 39 years for nonresidential real property. The midquarter convention required for personal property by the Tax Reform Act of 1986 does not apply to real property.

To compute the depreciation deduction for real property acquired after 1986, the system uses the straight-line method over a 27.5-year period for residential real property and a 31.5-year period for nonresidential real property (if acquired before May 13, 1993). For nonresidential property placed in service after May 12, 1993, the system uses a 39-year period. For both the year of acquisition and the year of disposition, the system uses the midmonth convention. One exception to this rule, however, does exist for leasehold improvements placed in service after October 22, 2004 and before 1/1/2018. These improvements are to be depreciated over a 15-year recovery period (9-year for Indian Reservation property) using the straight-line method of depreciation, and half-year convention (or midquarter, if applicable).