What is MACRS and What Does it Stand for?
MACRS stands for the Modified Accelerated Cost Recovery System. IRS Revenue Procedure 87-56, modified by Rev. Proc. 88-22 created the MACRS depreciation system. Thus, MACRS is the depreciation system used for real and personal property associated with commercial or residential real estate, and MACRS assigns a specific asset class that dictates the depreciable life of that asset. Commercial building components are depreciated over 39 years straight–line (SL) while residential real estate is depreciated over 27.5 years SL. Certain land improvements can be depreciated over 15 years utilizing 150% declining balance (DB) and certain personal property can be depreciated over 7 or 5 years at 200% DB.
What Method Must I use to Depreciate my Property?
Commercial and residential building owners are required to depreciate their property according to the Modified Accelerated Cost Recovery System (MACRS) for any property placed in service after 1986. The Accelerated Cost Recovery System (ACRS) was the depreciation system used from 1981to 1986 until it was repealed in 1986.
MACRS provides two different methods of depreciation: the General Depreciation System (GDS) or the Alternative Depreciation System (ADS). You must generally use GDS unless you choose to use ADS or the law requires the use of ADS in your case.
How Does MACRS Work?
In order to determine how tangible property must be depreciated, the IRS has set up different asset classes, and each asset class has its own depreciable life, which determines how many years that asset must be depreciated over. A specialized piece of HVAC might be depreciated over a 7 or 5-year life instead of the normal 27.5 or 39-year life. MACRS establishes the process of depreciating these components of property by allowing a taxpayer to recover annual deductions over the exact life of the tangible property. The class life will be different if the taxpayer chooses to use the General Depreciation System versus using the Alternative Depreciation System. The Alternative Depreciation System must be used in some instances, but the General Depreciation System is most often used. This table (B-1) can be found here. https://www.irs.gov/pub/irs-pdf/p946.pdf
Look Back Studies
The IRS allows an automatic consent to taxpayers to go back as far as 1986 (if they still own the building) to catch up on the depreciation the building owner(s) should have been claiming since the date the property was placed in service WITHOUT AMENDING PRIOR TAX RETURNS. All of the depreciation we find as a result of our detailed engineering-based CS report is caught up in the year you make the election. Your CPA completes IRS Form 3115 that computes the benefits of the look back.
Where can I find help to better understand MACRS?
It can be very helpful to talk with someone who has been working with building owners and their CPA’s. If you own commercial or residential property and have questions about MACRS, then give the professionals at McGuire Sponsel a call. We have been in the business of accelerating the depreciation of tangible and real property for over 24 years. We have over 150 years of combined cost segregation experience. If you have any questions regarding cost segregation studies, please call us or get an instant estimate of your savings by using our calculator.