MACRS (Modified Accelerated Cost Recovery System) is the IRS depreciation system used for business equipment. It determines how you write off equipment cost over time when you do not use Section 179 or bonus depreciation for the full amount.
MACRS class lives
| Class life | Recovery period | Typical equipment |
|---|---|---|
| 3-year | 3 years | Tractor units (over-the-road), special tools, racehorses |
| 5-year | 5 years | Light trucks, computers, copiers, some manufacturing, office equipment |
| 7-year | 7 years | Most heavy equipment, furniture, fixtures, agricultural equipment |
| 10-year | 10 years | Single-purpose ag/horticultural structures, certain barges |
| 15-year | 15 years | Land improvements, restaurant property, retail motor fuels improvements |
| 20-year | 20 years | Farm buildings, certain real property |
Most equipment finance discussions involve 5-year and 7-year property.
The depreciation method
MACRS uses declining balance methods that switch to straight line:
- 3, 5, 7, 10-year property: 200% declining balance, switching to straight line
- 15 and 20-year property: 150% declining balance, switching to straight line
- 27.5 and 39-year (real property): Straight line only
5-year property MACRS schedule
| Year | Depreciation % |
|---|---|
| 1 | 20.00% |
| 2 | 32.00% |
| 3 | 19.20% |
| 4 | 11.52% |
| 5 | 11.52% |
| 6 | 5.76% |
Note: 6 years for 5-year property because of the half-year convention.
7-year property MACRS schedule
| Year | Depreciation % |
|---|---|
| 1 | 14.29% |
| 2 | 24.49% |
| 3 | 17.49% |
| 4 | 12.49% |
| 5 | 8.93% |
| 6 | 8.92% |
| 7 | 8.93% |
| 8 | 4.46% |
Worked example
$100,000 piece of 5-year property placed in service mid-year. Section 179 and bonus depreciation already exhausted.
Annual depreciation:
- Year 1: $100,000 × 20% = $20,000
- Year 2: $100,000 × 32% = $32,000
- Year 3: $100,000 × 19.2% = $19,200
- Year 4: $100,000 × 11.52% = $11,520
- Year 5: $100,000 × 11.52% = $11,520
- Year 6: $100,000 × 5.76% = $5,760
- Total: $100,000
Half-year convention
The standard MACRS convention assumes equipment is placed in service mid-year, regardless of actual date. This is why “5-year” property takes 6 years to fully depreciate.
Exception: if more than 40% of total property is placed in service in the last 3 months of the year, the mid-quarter convention applies, with different first-year and last-year tables.
Stacking with Section 179 and bonus
The optimal stacking order:
- Section 179 first (up to limit or taxable income)
- Bonus depreciation on remaining basis (40% in 2025, declining)
- MACRS on whatever remains
Most equipment buyers fully expense in year 1 via Section 179 + bonus, so MACRS only applies when the limits are exceeded or election out.
When to elect MACRS instead of Section 179
Reasons to NOT use Section 179:
- Spread deductions across years to match expected income
- Avoid creating a net operating loss
- State conformity issues that limit Section 179 benefit
- Maintaining basis for future strategic use
Alternative Depreciation System (ADS)
ADS is a slower, straight-line method. Required for:
- Property used predominantly outside the US
- Tax-exempt use property
- Listed property used 50% or less for business
- Property financed by tax-exempt bonds
You can also elect ADS voluntarily. Sometimes useful for tax planning.
State conformity
Most states follow federal MACRS for state income tax. Some decouple (decoupled bonus depreciation, lower Section 179 limits). Check your state’s rules with your CPA.
Action steps
- Confirm equipment classification (5-year vs 7-year vs other)
- Plan Section 179 and bonus depreciation strategy first
- MACRS applies to remaining basis
- Track depreciation by tax year on Form 4562
- Confirm state conformity with your CPA