Depreciation Methods

The depreciation method that you use for any particular asset is fixed at the time you first place that asset into service. Whatever rules or tables are in effect for that year must be followed as long as you own the property. Since Congress has changed the depreciation rules many times over the years, you may have to use a number of different depreciation methods if you've owned business property for a long time.

For most business property placed in service after 1986, if you don't claim the equipment expensing deduction for the full cost of the item, the IRS requires you to depreciate the asset using a method called "MACRS," which stands for Modified Accelerated Cost Recovery System. This method categorizes all business assets into classes and specifies the time period over which you can write off assets in each class.

Tip

The IRS has issued new depreciation regulations that generally apply to tax years beginning on or after January 1, 2014. But, for 2012 and 2013, it also provided taxpayers with the ability to elect certain regulations. The best choice for each taxpayer depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you and your business.

Some assets are not eligible for MACRS depreciation, including intangible assets such as patents, trademarks, and business goodwill. Generally these must be amortized (written off in equal amounts) over a 15-year period, beginning in the month of acquisition.

Once you know the classification and the tax basis of the asset you need to depreciate, you can use a special table provided by the IRS to determine the percentage of the item's tax basis that can be deducted each year. MACRS provides for a slightly larger write-off in the earlier years of the cost recovery period. The full set of depreciation tables showing the MACRS percentages are available in the IRS's free publication 946, How to Depreciate Property, available on the Internet at the IRS web site or by calling 1-800-TAX-FORM.

Some special variations of MACRS, or other depreciation methods, are available (or even mandatory) in certain situations.

Assets of similar types may be grouped into general asset accounts.

Variations on MACRS are available, for those who desire slower depreciation. They are mandatory for farm property and for 15- and 20-year property.

Straight-line depreciation is also available, and is mandatory for some alternative minimum tax purposes

Older methods of depreciation are used for pre-1987 property.