MACRS depreciation

MACRS depreciation is the tax depreciation system used in the United States. MACRS is an acronym for Modified Accelerated Cost Recovery System. Under MACRS, fixed assets are assigned to a specific asset class. The Internal Revenue Service has published a complete set of depreciation tables for each of these classes. The classes are:

3-year property 3 years Tractor units for over-the-road use, race horses over 2 years old when placed in service, any other horse over 12 years old when placed in service, qualified rent-to-own property
5-year property 5 years Automobiles, taxis, buses, trucks, computers and peripheral equipment, office equipment, any property used in research and experimentation, breeding cattle and dairy cattle, appliances & etc. used in residential rental real estate activity, certain green energy property
7-year property 7 years Office furniture and fixtures, agricultural machinery and equipment, any property not designated as being in another class, natural gas gathering lines
10-year property 10 years Vessels, barges, tugs, single-purpose agricultural or horticultural structures, trees/vines bearing fruits or nuts, qualified small electric meter and smart electric grid systems
15-year property 15 years Certain land improvements (such as shrubbery, fences, roads, sidewalks and bridges), retail motor fuels outlets, municipal wastewater treatment plants, clearing and grading land improvements for gas utility property, electric transmission property, natural gas distribution lines
20-year property 20 years Farm buildings (other than those noted under 10-year property), municipal sewers not categorized as 25-year property, the initial clearing and grading of land for electric utility transmission and distribution plants
25-year property 25 years Property that is an integral part of the water distribution facilities, municipal sewers
Residential rental
27.5 years Any building or structure where 80% or more of its gross rental income is from dwelling units
Nonresidential real
39 years An office building, store, or warehouse that is not residential property or has a class life of less than 27.5 years

A business determines its tax depreciation based on the information in the preceding table for assets ready and available for use since 1986. The resulting depreciation is included in the company's income tax return as part of the derivation of taxable income. This depreciation is not used in the entity's financial statements, which instead likely uses depreciation that is based on either straight-line or some form of accelerated depreciation calculations. This can result in differences between the tax basis and book basis of an organization's fixed assets.