MACRS Fundamentals: § 168 Methods, Recovery Periods, and Conventions

MACRS under § 168 is the default depreciation system for tangible property placed in service after 1986. The deduction is computed from four inputs: applicable depreciation method, applicable recovery period, applicable convention, and adjusted basis. The election landscape (ADS, straight-line, mid-quarter, bonus, § 179) determines where the deduction actually lands.

The GDS framework

GDS recovery periods under § 168(c) and Rev. Proc. 87-56:

• 3-year: rent-to-own property, certain racehorses, software
• 5-year: autos, light trucks, computers and peripherals, office machinery, R&E equipment, qualified energy property
• 7-year: office furniture, fixtures, equipment without a more specific class
• 10-year: certain water transport, single-purpose ag structures, certain orchards/vineyards
• 15-year: land improvements, qualified improvement property (QIP) post-CARES, retail motor fuels, qualified leasehold/retail/restaurant improvement (legacy classes)
• 20-year: farm buildings, municipal sewers
• 25-year: water utility property
• 27.5-year: residential rental property (§ 168(e)(2)(A): 80%+ of gross rental income from dwelling units)
• 39-year: nonresidential real property

Methods under § 168(b): 200% DB for 3/5/7/10-year; 150% DB for 15/20-year (and electively for shorter classes); straight-line for residential rental, nonresidential real, and railroad grading or tunnel bore.

Conventions

The applicable convention under § 168(d) determines first-year and last-year depreciation:

• Half-year (HY): default for personal property. All placements treated as mid-year.
• Mid-quarter (MQ): mandatory if more than 40% of the aggregate depreciable basis of MACRS property (excluding real property and property placed in service and disposed of in the same year) is placed in service in the last three months of the taxable year. Switches all personal property placed in service that year to MQ. Frequently triggered unintentionally by Q4 equipment buys.
• Mid-month (MM): for residential rental, nonresidential real property, and railroad grading or tunnel bore.

Bonus depreciation under § 168(k)

Qualifying property: tangible MACRS property with a recovery period of 20 years or less, plus computer software, water utility property, qualified film/TV/live theatrical productions, and specified plants. New and used property qualifies under TCJA, subject to the unrelated-party rule and prior-use rule under § 168(k)(2)(E)(ii).

Phase-down schedule: 100% (9/28/17–12/31/22) → 80% (2023) → 60% (2024) → 40% (2025) → 20% (2026) → 0% (2027). Specific property with longer production periods and certain aircraft get a year of extension.

Election out is per-class, attached to a timely-filed return. Once elected out for a class, the election is irrevocable absent IRS consent.

§ 179 expensing

Per-asset election. 2024 dollar limit: $1,160,000; phaseout begins at $2,890,000 of total § 179 property placed in service. Limited to taxable income from the active conduct of any trade or business (rental real estate is generally not a trade or business for § 179 purposes unless rising to a § 162 trade or business). Disallowed amount carries forward.

Eligible property under § 179(d) includes most tangible personal property used in a trade or business, off-the-shelf computer software, and certain improvements to nonresidential real property (roofs, HVAC, fire protection, alarms) post-TCJA.

Recapture under § 179(d)(10) applies if business use of the asset drops to 50% or less during the recovery period.

ADS under § 168(g)

ADS is straight-line over longer recovery periods. It applies to (1) tax-exempt use property, (2) property used predominantly outside the U.S., (3) property financed with tax-exempt bonds, (4) imported property covered by an executive order, and (5) property where the taxpayer elects ADS under § 168(g)(7).

The major practical use: real property trades or businesses that elect out of the § 163(j) interest limitation must use ADS for residential rental (30 years), nonresidential real (40 years), and QIP (20 years). The trade-off (no business interest limit vs. slower depreciation, no bonus on QIP under ADS) is a discrete client-level computation, not a default answer.

Placed in service standard

Under Reg. § 1.46-3(d)(1)(ii) and a long line of Rev. Ruls. (76-256, 76-238, 76-428, 79-98), property is placed in service when it is in a condition or state of readiness and availability for a specifically assigned function. For rental real estate, this is the date the property is ready to be rented, not the date of acquisition and not the date the first tenant moves in.

Conversion to personal use

Under T.D. 9132, conversion of MACRS property from business or income-producing use to personal use is treated as a disposition. No gain, loss, or depreciation recapture is recognized at the time of conversion; § 1245 or § 1250 applies on any later disposition by the taxpayer.

AMT

For property placed in service after 1998, AMT depreciation for property other than real property is the same 150% DB (rather than 200% DB) over the GDS recovery period. Bonus depreciation under § 168(k) is allowed for AMT to the same extent as for regular tax under § 168(k)(2)(G). Pre-2017 property may still carry AMT timing differences.