13.1 MACRS Recovery Periods and Conventions
Key Takeaways
- MACRS under IRC §168 is the mandatory tax depreciation system for most tangible property placed in service after 1986; land is never MACRS property and must be stripped out of a realty purchase before any recovery period is assigned.
- GDS personal-property classes are 3, 5, 7, 10, 15, and 20 years: cars and computers are 5-year property, and office furniture and most machinery are 7-year property.
- Residential rental real property is recovered over 27.5 years and nonresidential real property over 39 years, both under the mid-month convention.
- Half-year is the default convention for personal property; mid-quarter applies to all personalty for the year if more than 40 percent of personal-property bases (real property excluded) is placed in service in the last three months.
- Listed property used 50 percent or less in a qualified business must use ADS straight-line; even above 50 percent, only the business-use percentage of otherwise allowable MACRS is deducted.
13.1 MACRS Recovery Periods and Conventions
REG Area III, Group B asks you to calculate tax depreciation for tangible business property using MACRS, including identification of the applicable recovery period and convention. Depreciable basis was built in /study-guides/cpa-reg/asset-basis/cost-and-conversion-basis. This section starts after the asset has that basis and has been placed in service. Section 13.2 then layers the §179 election and the §168(k) special depreciation allowance on the same basis. Land never enters the computation.
MACRS is the tax system
The Modified Accelerated Cost Recovery System in IRC §168 is the mandatory depreciation system for most tangible property placed in service after 1986 and used in a trade or business or held for the production of income. Book useful lives, residual values, and a manager’s estimate of how long a copier will last do not control the tax deduction. MACRS assigns a class, a method, and a convention. The general depreciation system (GDS) is the default. The alternative depreciation system (ADS) is a longer, straight-line overlay required in a short list of cases — tax-exempt use property, certain listed property with qualified business use of 50 percent or less, and property used predominantly outside the United States. REG flags when ADS is required; it does not ask you to recite ADS class lives from memory.
Land is not MACRS property. A closing statement that buys land and a building must be allocated on a reasonable fair-market-value basis. Only the building and other depreciable improvements are recovered. Leaving the land slice in a 39-year account is a completeness error on the depreciation schedule, not a convention error.
Personal-property classes under GDS
Personalty uses 3-, 5-, 7-, 10-, 15-, and 20-year recovery periods. The GDS method is 200 percent declining balance, switching to straight-line when that produces a larger deduction, for the 3-, 5-, 7-, and 10-year classes, and 150 percent declining balance for 15- and 20-year property. Realty is straight-line. REG’s tested catalog:
| GDS class | Typical assets | Convention |
|---|---|---|
| 3-year | Certain racehorses; qualified rent-to-own property | Half-year, unless the mid-quarter test is met |
| 5-year | Cars, light general-purpose trucks, computers and peripherals, copiers and similar office machinery | Half-year, unless the mid-quarter test is met |
| 7-year | Office furniture and fixtures, most machinery and equipment, assets with no class life | Half-year, unless the mid-quarter test is met |
| 10-year | Vessels, barges, certain qualified production property | Half-year, unless the mid-quarter test is met |
| 15-year | Land improvements (fences, sidewalks), qualified improvement property (QIP) | Half-year, unless the mid-quarter test is met |
| 20-year | Certain farm buildings; municipal sewers | Half-year, unless the mid-quarter test is met |
| 27.5-year | Residential rental real property (80% or more of gross rental income from dwelling units) | Mid-month |
| 39-year | Nonresidential real property (offices, warehouses, stores) | Mid-month |
Computers are 5-year property, not 7-year. Office furniture is 7-year property, not 5-year. Most machinery with no other class life falls into 7-year. An apartment building that produces 80 percent or more of its gross rental income from dwelling units is residential rental (27.5 years). An office, warehouse, or store is nonresidential (39 years). Qualified improvement property — interior improvements to nonresidential real property that are not elevators, escalators, or enlargements of the building — is 15-year property, which is why it can take bonus depreciation in the next section.
Conventions
Three conventions do the placed-in-service timing. Mixing them is the usual MACRS miss.
Half-year is the default for personal property. MACRS treats every personal-property asset as placed in service at the midpoint of the tax year, whether it arrived in January or in October. First-year GDS for 7-year property under the half-year convention is 14.29 percent of depreciable basis (IRS Table A-1).
Mid-quarter replaces half-year for all personal property placed in service during the year if more than 40 percent of the aggregate bases of personal property placed in service during the year is placed in service during the last three months. Real property is left out of both the numerator and the denominator. A December warehouse does not drag March furniture into mid-quarter, and it does not pull a November computer out of mid-quarter. Once the test is failed, every personal-property asset that year uses the mid-quarter table for the quarter in which that asset was placed in service.
Mid-month applies to residential rental and nonresidential real property. The building is treated as placed in service at the midpoint of the month of placement. A January 2 placement and a January 31 placement produce the same first-year fraction.
Worked: 7-year furniture placed in March
Facts. Calendar-year taxpayer. Depreciable basis of 7-year office furniture placed in service on March 12: $40,000. No §179 election. No bonus. Use the IRS GDS percentages.
Case A — only the furniture is placed in service. Nothing is placed in the fourth quarter, so the 40 percent test is not met. Half-year applies even though the furniture arrived in March.
Year 1 MACRS = $40,000 × 14.29% = $5,716.
Case B — the same furniture, but mid-quarter applies. In the same year the taxpayer also places $50,000 of 5-year computers in service in November and places a $600,000 warehouse building (land already stripped out) in service in December.
Personal property placed in service: $40,000 + $50,000 = $90,000. Fourth-quarter personal property: $50,000. $50,000 ÷ $90,000 = 55.6 percent, which is more than 40 percent. The warehouse is ignored for the test. Mid-quarter therefore applies to both the furniture and the computers.
March is the first quarter. The first-year 7-year mid-quarter first-quarter rate is 24.99 percent (IRS Table A-2).
Year 1 MACRS on the furniture = $40,000 × 24.99% = $9,996.
The same March asset produces more first-year depreciation under mid-quarter first-quarter than under half-year. A fourth-quarter placement does the opposite: the 7-year mid-quarter fourth-quarter rate is 3.57 percent. The exam trap is applying half-year to the March furniture after the 40 percent test has already been failed, or running the 40 percent fraction with the building inside it.
Listed property and mixed business use
Listed property includes passenger automobiles and other property used for transportation, property of a type generally used for entertainment or recreation, and computers other than those used exclusively at a regular business establishment. If qualified business use is more than 50 percent, GDS is allowed, but only the business-use percentage of otherwise allowable depreciation is deducted. If qualified business use is 50 percent or less, ADS straight-line is required, and §179 and bonus are unavailable. A car used 60 percent for business is not “60 percent listed”; it is listed property whose MACRS deduction is multiplied by 60 percent — and, for passenger automobiles, further limited by the §280F dollar caps treated conceptually in Section 13.2.
Reviewing the depreciation schedule
A calendar-year taxpayer places $40,000 of 7-year office furniture in service on March 12. No other depreciable property is placed in service during the year. The taxpayer elects no §179 deduction and elects out of bonus. What is Year 1 MACRS?
A calendar-year business places $40,000 of 7-year furniture in service in March, $50,000 of 5-year computers in service in November, and a $600,000 warehouse building (land already excluded) in service in December. Which convention applies to the furniture?
A newly constructed apartment building produces 90 percent of its gross rental income from dwelling units. What is the GDS recovery period and convention?