9.1 MACRS Cost Recovery: Asset Classes, Conventions & IRS Tables

Why tax depreciation is a separate skill from GAAP

AIPB's Mastering Depreciation workbook treats federal tax depreciation as its own skill after the GAAP methods. That split is the whole point of this chapter. On the books, Harbor Street HVAC, LLC may depreciate a $10,000 desk set straight-line over a seven-year useful life with a salvage value. On the tax return, the same desk set is 7-year MACRS property. The journal entry that hits Depreciation Expense for the financial statements is not automatically the number that goes on Form 4562. Certified Bookkeeper Part 2, Test 2 (Depreciation) expects you to know both worlds and to keep them from contaminating each other.

Modified Accelerated Cost Recovery System (MACRS) is the system the Internal Revenue Service requires for most tangible property placed in service after 1986. IRS Topic 704 states that property placed in service before 1987 generally stays on ACRS or the method used in the past. Harbor Street's 2026 truck, computer, and warehouse addition are MACRS problems.

This section is independent OpenExamPrep teaching of the IRS rules bookkeepers apply. It is not an IRS or AIPB publication and does not claim official approval, partnership, or exact equivalence with AIPB workbook wording.

What can be depreciated for tax

Topic 704 and Pub 946 chapter 1 use the same five tests. Property is depreciable only if all of the following are true:

1. You own it (including certain leased property where you have the incidents of ownership).
2. You use it in a trade or business or an income-producing activity.
3. It has a determinable useful life.
4. It is expected to last more than one year.
5. It is not excepted property (inventory, land, property placed in service and disposed of in the same year, and other Pub 946 exceptions).

Land is never depreciable. A $240,000 purchase allocated $40,000 to land and $200,000 to a shop building gives Harbor Street a $200,000 depreciable basis, not $240,000. Buildings, machinery, vehicles, and furniture can be depreciated. Mixed-use property is depreciated only on the business or investment portion.

Placed in service is the date the asset is ready and available for a specific use. It is not always the invoice date, the payment date, or the first day someone happened to flip the switch. Convert personal property to business use and the placed-in-service date is the conversion date.

Trap: posting tax depreciation from the date the check cleared in January when the compressor did not arrive and was not available for jobs until March. MACRS starts in March.

You must reduce tax basis by depreciation allowed or allowable, whichever is greater. If Harbor Street forgets to take 2026 MACRS, basis still drops by the allowable amount. Skipping the deduction does not preserve basis for a later sale.

GDS versus ADS

MACRS has two systems. General Depreciation System (GDS) is the default. Alternative Depreciation System (ADS) uses straight-line over generally longer recovery periods. Pub 946 requires ADS for listed property used 50% or less in a qualified business use, property used predominantly outside the United States, tax-exempt use property, tax-exempt bond-financed property, and several farming and real-property-trade elections. If ADS is required, you cannot claim the special depreciation allowance (bonus) on that property.

You may elect ADS even when GDS is allowed. The election generally covers all property in the same class placed in service during the year, except residential rental and nonresidential real property, which can be elected property by property. Once made, the election cannot be revoked.

Property classes bookkeepers actually code

Pub 946 lists nine GDS classes. Harbor Street's recurring codes:

Qualified improvement property is an interior improvement to nonresidential real property, placed in service after the building was first placed in service, that is not an enlargement, elevator, escalator, or internal structural framework. QIP is 15-year GDS property. A new roof, HVAC, fire alarm, or security system on nonresidential real property can be section 179 property even though a brand-new building is not.

Off-the-shelf computer software that is readily available to the public, under a nonexclusive license, and not substantially modified is section 179 property. If you depreciate software under section 167(f) instead, Pub 946 uses straight-line over 36 months.

Methods inside GDS

Pub 946 Table 4-1:

• 200% declining balance, switching to straight-line when SL is larger, for nonfarm 3-, 5-, 7-, and 10-year property (and for farm 3-, 5-, 7-, and 10-year property placed in service after 2017).
• 150% declining balance, switching to SL, for 15- and 20-year property.
• Straight-line for nonresidential real, residential rental, water utility, trees and vines, and QIP.

You may elect 150% DB or SL over the GDS period for personal property. Electing a different method for one item in a class generally forces that method for all property in that class placed in service that year.

The 200% DB rate before the convention is 2 divided by the recovery period. For 5-year property that is 40%. For 7-year property Pub 946 uses 0.28571. The half-year convention then gives only half of that first-year DB amount, which is why Table A-1 year 1 for 5-year property is 20.00% (40% × ½) and year 1 for 7-year property is 14.29%.

Do not memorize a homemade later-year string such as 32% / 19.2% unless you are reading it from Pub 946 Appendix A. The IRS tables already bake in the switch from declining balance to straight-line and the extra half-year at the end of the recovery period. 5-year property under the half-year convention is recovered over six calendar years of table percentages because year 1 and the last year are each a half year.

The three conventions

A convention is an averaging rule for the year you place property in service and the year you dispose of it.

Exclude from the 40% test: nonresidential real property, residential rental property, railroad grading or tunnel bore, property placed in service and disposed of in the same year, and property not depreciated under MACRS. Reduce each asset's basis by section 179 and by personal-use percentage before the test. Do not reduce the test bases for bonus (the special depreciation allowance).

Mid-quarter first-year fractions of a full year of depreciation, from Pub 946's 12-month examples:

On disposition, half-year property gets half a full year's table amount. Mid-quarter property uses the same quarter fractions in the year of disposal. Mid-month real property treats the disposal month as a half month.

Form 4562 is the tax worksheet, not the GAAP register

File Form 4562 when you claim section 179 (including a carryover), depreciation on property placed in service this year, depreciation on any vehicle or other listed property no matter when placed in service, certain vehicle deductions reported off Schedule C, first-year amortization, or corporate depreciation. Pub 946 Table 1-1: Part I is section 179, Part II is the special depreciation allowance (other than listed property), Part III is MACRS, and Part V is automobiles and other listed property. Employees claiming job-related vehicle costs use Form 2106, not 4562.

A bookkeeper may therefore keep two depreciation schedules: a GAAP register that feeds the financial statements and a tax register that feeds Form 4562. The gap is usually a temporary difference that reverses as tax catches up or book finishes later. Chapter 8 covers the GAAP methods. This chapter never posts tax MACRS into the GAAP expense account without a mapping the CPA or owner has approved.

Worked MACRS examples (IRS table rates only)

Example 1 — 7-year furniture, half-year, Table A-1 year 1. Harbor Street buys office furniture for $10,000, places it in service August 11, uses it 100% in the HVAC office, elects no section 179 and no special depreciation allowance, and places no other MACRS property in service this year. Pub 946's own furniture example uses GDS, 200% DB, half-year, Table A-1. Year-1 table rate for 7-year property is 14.29% (0.1429). Year-1 MACRS = $10,000 × 0.1429 = $1,429. Later years: multiply the same unadjusted basis of $10,000 by the Table A-1 percentage for that year. Do not invent those later percentages.

Example 2 — 5-year equipment, half-year, 20.00%. Harbor Street places a $40,000 diagnostic scanner (5-year property) in service in April 2026, 100% business, no 179, elects out of bonus, and fails the mid-quarter test because this is the only personal-property addition. Pub 946's passenger-auto illustration multiplies unadjusted basis by 0.20 for Table A-1 5-year property in year 1. Year-1 MACRS = $40,000 × 20.00% = $8,000. Years 2–6 come from Table A-1, not from a 32% shortcut unless you have the table open.

You can derive the 20.00% without the table: 200% DB rate = 2 ÷ 5 = 40%; half-year convention ÷ 2 → 20% of original basis. Pub 946's $1,000 5-year example produces $200 of first-year 200% DB depreciation, the same 20%.

Example 3 — mid-quarter 40% test, copied from Pub 946's facts. During the year you buy a machine (7-year) for $4,000 in January, office furniture (7-year) for $1,000 in September, and a computer (5-year) for $5,000 in October. No 179, no bonus. Total MACRS bases = $10,000. Fourth-quarter basis = $5,000, which is 50%, and 50% > 40%, so mid-quarter applies to all three items, including the January machine. The computer is 5-year property placed in the fourth quarter. Full-year 200% DB = $5,000 × 40% = $2,000; fourth-quarter fraction 12.5%; year-1 MACRS = $250 (5% of cost). Pub 946 also states the Table A-5 first-year result for 5-year fourth-quarter property as 5% ($500 on a $10,000 asset in a related example).

Example 4 — 39-year building, mid-month. Harbor Street buys a $100,000 shop building (land carved out already) and places it in service in January. GDS straight-line rate is 1 ÷ 39 ≈ 0.02564. Full year = $2,564. Mid-month January is 11.5 / 12 = 0.958 of a year. Year-1 tax depreciation = $2,564 × 0.958 = $2,456, matching Pub 946's nonresidential example. February would be 10.5/12; December would be 0.5/12.

Example 5 — book versus tax on the same $10,000 furniture. Books: straight-line, seven-year life, $1,000 salvage → annual book depreciation ($10,000 − $1,000) / 7 = $1,286 (full year; prorate if the firm's book policy uses nearest-month). Tax year 1 (from Example 1): $1,429. Tax depreciation exceeds book by $143 in year 1. That extra tax deduction is a temporary difference. Over the full tax recovery (which spills into year 8 because of the half-year convention) versus the seven book years, the cumulative difference reverses. The bookkeeper's job is to keep both schedules, not to force one number into both ledgers.

Exam traps

1. Using the GAAP life on Form 4562. Useful life and salvage belong to the books. Tax uses class lives and IRS tables.
2. Depreciating land or failing to allocate a lump-sum closing statement.
3. Ignoring the 40% test because "most of the dollars were in January." One expensive October computer can drag the January machine onto mid-quarter.
4. Reducing the 40% test for bonus. Pub 946: reduce for 179 and personal use, not for the special depreciation allowance.
5. Inventing later-year MACRS percentages. Year 1 5-year half-year is 20.00%; year 1 7-year half-year is 14.29%. Everything after that is Appendix A.
6. Starting MACRS on the check date instead of the placed-in-service date.
7. Forgetting that allowable depreciation still reduces basis when nobody posted the 4562 line.
8. Applying half-year to a warehouse. Buildings are mid-month, 27.5 or 39 years, straight-line.

Section 9.2 stacks section 179 and bonus on top of this MACRS engine. Section 9.3 then special-cases listed property and vehicles. Learn the class, the convention, and which IRS table you are in before you touch those overlays.