Modified Accelerated Cost Recovery System (MACRS)
The Tax Reform Act of 86 (TRA 86) requires that taxpayers use a modified accelerated cost recovery system (MACRS) of depreciation for most tangible depreciable property placed in service after December 31, 1986. The deduction for depreciation of MACRS property is determined by using the applicable method, the applicable recovery period, and the applicable convention. Which category applies to a particular property is based upon the class into which the property falls. The taxpayer must further identify the asset depreciation range (ADR) class that is appropriate for the asset class in order to establish an ADR midpoint life. The appropriate ADR midpoint life is cross-referenced to the eight recovery classes of property as outlined in the TRA 86.
Each item of property is assigned to one of the following classes:
MACRS 3 – Year Property
In general, three-year property includes property with an ADR class life of four years or less.
MACRS 5 – Year Property
Five-year property generally includes property with an ADR class life of more than four and less that ten years. Specifically added to this class are the following:
- Cars
- Light general-purpose trucks
- Qualified technological equipment
- Computer-based telephone central office switching equipment
- Research and experimental property
- Semi-conductor manufacturing equipment
- Geothermal, ocean thermal, solar, and wind energy properties
MACRS 7 – Year Property
Seven-year property includes property with an ADR class life of 10 years or more but less than 16 years. Such property also includes any railroad track and property that does not have a class life and is not otherwise classified.
MACRS 10 – Year Property
Generally, 10-year property is property with an ADR class life of 16 years or more and less than 20 years, single-purpose agricultural or horticultural structures and any tree or vine bearing fruit or nuts.
MACRS 15 – Year Property
Included within 15-year property is property with an ADR class life of 20 years or more but less than 25 years. Such property includes municipal wastewater treatment plants, telephone distribution plants, and other comparable equipment used for the two-way exchange of voice and data communications.
Comparable equipment is equipment used by non-telephone companies for two-way exchange of voice and data communications. Such equipment does not include cable television equipment used primarily for one-way communication.
MACRS 20 – Year Property
Twenty-year recovery property includes property with an ADR class life of 25 years or more, other than Internal Revenue Code Section 1250 real property with an ADR midpoint life of 27.5 years or more. Municipal sewers are included within this class.
MACRS 27.5 – Year Residential Rental Property
Residential rental property includes buildings or structures with respect to which 80% or more of the gross rental income is rental income from dwelling units, If the taxpayer occupies any portion of the building or structure, the gross rental income from the property includes the rental value of the unit occupied by the taxpayer.
A dwelling unit is a house or apartment used to provide living accommodations. It does not include a unit in a hotel, motel, inn, or other establishment in which more than 50% of the units are used on a transient basis.
The conference committee report on the TRA 86 indicates that such property includes manufactured homes that are residential rental property.
MACRS 39 – Year Non-residential Real Property
Nonresidential real property is Internal Revenue Code Section 1250 real property that is not (1) residential rental property or (2) property with a class life of less than 27.5 years. The conference committee report indicates that this class includes elevators, escalators, and property either that has no ADR class life or whose class life is 27.5 years or more.
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