What is depreciation?
IRS Publication 946, How To Depreciate Property, explains it this way:
Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.
In other words, it is the method by which a business can expense part of the cost of an asset each year over the asset's recovery period.
What is MACRS depreciation?
MACRS or Modified Accelerated Cost Recovery System is, in my opinion, a needlessly complicated system, designed by Congress and implemented by the IRS, for depreciating the cost of assets. MACRS replaced ACRS (Accelerated Cost Recovery System) in 1986.
This MACRS Depreciation Calculator supports nearly all the nuances and conventions of the Internal Revenue Code. It includes support for qualified and listed assets including motor vehicles. While the calculator is capable of depreciating nearly any asset, if you want to use it correctly, you'll need to familiarize yourself with Publication 946 (linked above).
With all other calculators on this site, I attempt to provide detailed instructions for their use. That is impossible when it comes to using the MACRS Depreciation Calculator. As mentioned, the writers of the IRC (Internal Revenue Code) have made the subject of depreciation needlessly complicated. While depreciation arithmetic is rather simple — it can be explained in about half a page, the rules governing depreciation cover nearly 100 pages (spread across multiple publications).
Though I have been studying depreciation since before there was MACRS (1986), I am most certainly NOT an income tax professional.
Nonetheless, below is some general guidance on the calculator's use. Much of it comes directly from IRS Publication 946.
A special note about automobile depreciation. In February 2019, the IRS published a revenue procedure that "provides a safe harbor method of accounting for determining depreciation deductions for passenger automobiles." I point this out, because there is no mention of the safe harbor details in Publication 946 (as of the edition published in early 2020 "for use in preparing 2020 returns"). Applying the safe harbor rules results in significantly different depreciation deductions. As of April 13, 2020, this calculator now supports the safe harbor depreciation procedure. A special thank you goes out to Robert Valentine, CPA, for pointing this out to me. Robert publishes a depreciation calculator for Windows. (I've not used it.)
What Property Can Be Depreciated?
IRS Pub. 946 p.4:
You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. You also can depreciate certain intangible property, such as patents, copyrights, and computer software.
- It must be property you own.
- It must be used in your business or income-producing activity.
- It must have a determinable useful life.
- It must be expected to last more than one year.
Options, settings, and inputs explained
Basis - The basis is frequently the cost of the asset. Frequently, but not always. The basis for real estate is always different than the contract purchase price. If you are depreciating property, you must deduct the value of the land. But, you also add to the basis your settlement costs. For example (Pub. 946 p 12):
- Legal and recording fees.
- Abstract fees.
- Survey charges.
- Owner's title insurance.
- Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for
Business Use - If the asset is not used entirely for business, enter the percentage that is for business use. If you enter $100,000 for basis and business use is 80%, then the basis for depreciation (adjusted basis) is $80,000. (The calculator makes this calculation of course.)
Asset Being Depreciated - This has no impact on the calculation. It is included here so that when you print a schedule, it will include the identity of the asset.
Placed Into Service - The date when the asset is available for use. You should note that the business does not have to be using the asset. As long as it is available, the asset is in service.
179 Deduction - The basis is lowered by any 179 deduction that you take.
IRS Pub. 946 p.2:
What’s New for 2019
Section 179 deduction dollar limits. The maximum amount you can deduct for most section 179 property you placed in service in tax years beginning in 2019 is $1,020,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,550,000.Also, the maximum section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2019 is $25,500.
IRS Pub. 946 p.15:
You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.
Class Life / Recovery Period -
IRS Pub. 946 p.32:
The recovery period of property is the number of years over which you recover its cost or other basis. It is determined based on the depreciation system (GDS or ADS) used.
The recovery periods available is determined by the depreciation method selected. The calculator automatically limits the choice of recovery periods to the ones that are appropriate for the method selected.
In general, recovery periods are longer under ADS than they are under GDS.
Depreciation Method - Currently, the taxpayer may select from one of four depreciation methods. Three methods fall under GDS and one under ADS. Two GDS methods use a declining balance equation that has the effect of accelerating the tax benefit.
IRS Pub. 946 pp.27 - 28
The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).
Which Depreciation System (GDS or ADS) Applies?
Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS.
IRS Convention - The three conventions establish when the recovery period begins and ends.
IRS Pub. 946 p.34
The mid-month convention: Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of.
The mid-quarter convention: Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. This means that one and one-half months of depreciation is allowed for the quarter the property is placed in service or disposed of.
The half-year convention: Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of.
Special Allowance - calculated. "Qualified Asset" must be set to "Yes" (see below).
IRS Pub. 946 p.23
You can take a special depreciation allowance to recover part of the cost of qualified property (defined next), placed in service during the tax year. The allowance applies only for the first year you place the property in service. The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service.
Qualified Asset - if your asset is a qualified asset, select the special allowance including the new 100% bonus depreciation.
Your property is qualified property if it is one of the following:
- Qualified reuse and recycling property. 50% special allowance.
- Qualified second generation biofuel plant property. 50% special allowance.
- Certain qualified property acquired before September 28, 2017. 30% special allowance, unless it is certain property with a "long production period" or "certain aircraft," then you can take a 40% special depreciation allowance.
- Certain qualified property acquired after September 27, 2017. 100% special allowance.
- Certain plants bearing fruits and nuts. 100% special allowance.
Is Asset a Vehicle? - when "Yes", it activates the many rules pertaining to vehicle depreciation, including maximum depreciation deductions.
Type of Vehicle - The vehicle type impacts the amount of the maxiumum depreciation that a taxpayer can deduct each year prior to 2018. After 2017, the maximum depreciation amount is the same for all vehicles. In 2019, the IRS issued a safe harbor ruling for vehicles. If you selects qualified asset 100% bonus depreciation then you should probably select safe harbor rules. But be careful. There are exceptions. For example, you can't select 100% bonus depreciation and have a 179 expense deduction too.
Listed Asset -
IRS Pub. 946 p.53
Listed property is any of the following:
- Passenger automobiles (as defined later).
- Any other property used for transportation, unless it is an excepted vehicle.
- Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment).
Note: The calculator will not create an accurate schedule that incorporates a short tax year.
IRS Pub. 946 p.45
A short tax year is any tax year with less than 12 full months. This section discusses the rules for determining the depreciation deduction for property you place in service or dispose of in a short tax year. It also discusses the rules for determining depreciation when you have a short tax year during the recovery period (other than the year the property is placed in service or disposed of).
MACRS Depreciation Calculator Help
The MACRS depreciation calculator adheres to US income tax code as found in IRS Publication 946 (opens in new tab).
Above is the best source of help for the tax code. If you have a question about the calculator and what it does or does not support, feel free to ask it in the comment section on this page.