# Modified Accelerated Cost Recovery System (MACRS): Explanation and Types

![Modified Accelerated Cost Recovery System (MACRS): A tax depreciation system used in the United States that allows the capitalized cost of an asset to be recovered over a specified period via annual deductions.](https://www.investopedia.com/thmb/H81kiB0L31N4buiIIF7OOREOMNY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Macrs_v3_final-deb14b4f59c04578804a82432c13e4c1.png)

*— Investopedia / Michela Buttignol*

## What Is the Modified Accelerated Cost Recovery System (MACRS)?

The Modified Accelerated Cost Recovery System (MACRS) is the primary tax depreciation system used in the United States. It allows businesses to recover the capitalized cost of certain assets over time through annual [depreciation](https://www.investopedia.com/terms/d/depreciation.asp) deductions. The system categorizes assets into classes with set depreciation periods, making it an essential tool for businesses aiming to reduce taxable income by accounting for the wear and tear of their assets.

### Key Takeaways

*   MACRS enables businesses to recover the cost of depreciable assets over a specified time period through annual deductions.
*   The IRS provides guidelines on asset eligibility and useful life, which dictate how long assets can be depreciated.
*   Depreciation under MACRS is accelerated, offering larger deductions in the initial years.
*   There are two types of MACRS systems: the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).
*   GDS is typically used, but in some instances, ADS is required.

## Understanding the Modified Accelerated Cost Recovery System (MACRS)

As defined by the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp), depreciation is an income tax deduction that allows a business to recover the cost basis of certain property. Deprecation is an annual allowance for the wear and tear, deterioration, or obsolescence of property. Most tangible assets are depreciable. Likewise, certain [intangible assets](https://www.investopedia.com/terms/i/intangibleasset.asp), such as patents and copyrights, are depreciable.

The modified accelerated cost recovery system (MACRS) is the proper depreciation method for most assets. MACRS allows for greater accelerated depreciation over longer time periods. This is beneficial since faster acceleration allows individuals and businesses to deduct greater amounts during the first few years of an asset's life, and relatively less later.

> **Important**
>
> For property placed into service after 1986, the IRS requires businesses to use MACRS for depreciation.

Depreciation using MACRS can be applied to assets such as computer equipment, office furniture, automobiles, fences, farm buildings, racehorses, and so on.

Now, there are things for which MACRS cannot be used for. Notably, intangible property, films, video tapes, and recordings. Other property excluded from MACRS include certain corporate or partnership property acquired in nontaxable transfers.

## Types of MACRS

There are two primary systems for depreciation under MACRS: [General Depreciation System (GDS)](https://www.investopedia.com/terms/g/generaldepreciationsystem.asp), and [Alternative Depreciation System (ADS)](https://www.investopedia.com/terms/a/alternative-depreciation-system.asp). These two systems differ in terms of recovery periods and depreciation methods. For the most part, GDS is used, although in special cases ADS can be used.

The general depreciation system uses the [declining balance method](https://www.investopedia.com/terms/d/decliningbalancemethod.asp), which allows for a larger depreciation expense to be recorded in the early years and smaller amounts in the later years. The alternative depreciation system allows depreciation to be taken over a longer period of time.

The GDS is best used for assets that depreciate quickly, such as computers and other technology. Meanwhile, the ADS must be used in certain instances, such as property used in a farming business, property that is exempt from taxation, or any property used outside the U.S. ADS must also be used for any listed property used 50% or less in a business during the tax year.

Businesses can elect to use ADS instead of GDS. The election must cover all property in the same property class, and once made, that election can never be changed.

## Property Classifications

The IRS publishes the [useful lives](https://www.investopedia.com/terms/u/usefullife.asp) of various classes of assets. This information is used to compute the depreciation for a given type of qualified asset. A few examples of some assets and their useful lives in years as published by the IRS include.

The IRS's Publication 946 (How to Depreciate Property) has a full breakdown of asset classes and their useful lives. Since the tax rules for MACRS are complex, the 100-plus pages of the IRS Publication 946 provide complete guidance on depreciating assets with MACRS.

The nine asset classes presented above are for GDS. There are more asset classes for ADS and the recovery life is longer. For example, the useful life of residential rental property under ADS is 30 years, and for commercial property, it is 40 years.

Based on the information provided in the table, a business can determine its [tax depreciation](https://www.investopedia.com/ask/answers/013015/what-best-method-calculating-depreciation-tax-reporting-purposes.asp) for assets. The basis for depreciation of MACRS property is the property's cost basis multiplied by the percentage of business/investment use. The amount derived is recognized in the company’s income tax return and used to determine taxable income by factoring in any tax credits and deductions that can be claimed on the property.

Note that the derived tax depreciation is not recorded in the financial statements, as these statements calculate depreciation using the [straight-line depreciation](https://www.investopedia.com/terms/s/straightlinebasis.asp) method or some other form of accelerated cost depreciation method.

> **Fast Fact**
>
> MACRS is used for tax purposes and not for financial statements, as it's not approved by U.S. Generally Accepted Accounting Principles (GAAP). For example, a company may use MACRS for tax depreciation and straight-line depreciation for creating financial statements.

## What Is IRS Publication 946?

IRS Publication 946 is a publication by the IRS that details how to depreciate property. In particular, it explains how to recover the cost of property (such as business equipment or income-producing assets) via deprecation.

## What Are the Tax Benefits of Depreciation?

Depreciation expenses lower the amount of income on which taxes are based, thereby reducing the amount of taxes owed. The benefit of accelerated depreciation is that you are getting a greater tax reduction in the earlier years of an [asset's](https://www.investopedia.com/terms/a/asset.asp) useful life.

## What Does Useful Life Mean?

Useful life is the accounting estimate of the number of years an asset is likely to remain in service for the purpose of producing income. The IRS determines the useful life for various assets, laying out the length of time in which they can be depreciated. For example, the useful life (according to the IRS) for automobiles is five years, while residential rental properties have a useful life of 27.5 years.

## The Bottom Line

The Modified Accelerated Cost Recovery System (MACRS) is the IRS’s preferred method for asset depreciation, allowing businesses to reduce their taxable income by recovering the cost of assets over time. By offering faster depreciation in the early years of an asset’s life, MACRS provides businesses with substantial [tax savings](https://www.investopedia.com/ask/answers/012715/what-are-best-ways-lower-my-taxable-income.asp).

Whether using the General Depreciation System (GDS) or the Alternative Depreciation System (ADS), MACRS is a critical tool for businesses looking to maximize tax benefits while properly managing asset depreciation.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Publication 946, How to Depreciate Property](https://www.irs.gov/pub/irs-pdf/p946.pdf)," Pages 3-4.
>     
> 2.  Cornell Law School, Legal Information Institute. "[MACRS](https://www.law.cornell.edu/wex/macrs)."
>     
> 3.  Internal Revenue Service. "[Publication 946, How to Depreciate Property](https://www.irs.gov/pub/irs-pdf/p946.pdf)," Page 26.
>     
> 4.  Internal Revenue Service. "[Publication 946, How to Depreciate Property](https://www.irs.gov/pub/irs-pdf/p946.pdf)," Pages 27-28.
>     
> 5.  Internal Revenue Service. "[Publication 946, How to Depreciate Property](https://www.irs.gov/pub/irs-pdf/p946.pdf)," Page 8.
>     
> 6.  Internal Revenue Service. "[Publication 946, How to Depreciate Property](https://www.irs.gov/pub/irs-pdf/p946.pdf)," Page 27.
>     
> 7.  Internal Revenue Service. "[Publication 946, How to Depreciate Property](https://www.irs.gov/pub/irs-pdf/p946.pdf)," Pages 31-32.
>     
> 8.  Internal Revenue Service. "[Publication 946, How to Depreciate Property](https://www.irs.gov/pub/irs-pdf/p946.pdf)," Pages 28-29, 35.
>     
> 9.  Internal Revenue Service. "[Publication 946, How to Depreciate Property](https://www.irs.gov/pub/irs-pdf/p946.pdf)," Pages 27-28, 31.
>     
> 10.  Internal Revenue Service. "[Publication 946, How to Depreciate Property](https://www.irs.gov/pub/irs-pdf/p946.pdf)," Page 30.
>      
> 11.  Internal Revenue Service. "[Publication 946, How to Depreciate Property](https://www.irs.gov/pub/irs-pdf/p946.pdf)," Pages 5, 28, 31.