What is MACRS depreciation and how should your startup account for it?

Published on:

May 28, 2026

Understanding MACRS matters for two reasons. First, getting the recovery period or depreciation method wrong means your tax returns are incorrect, which creates exposure during an IRS examination. Second, knowing how MACRS interacts with Section 179 and bonus depreciation can meaningfully reduce your taxable income in the years you are investing heavily in equipment and infrastructure.

What is MACRS depreciation?

MACRS stands for Modified Accelerated Cost Recovery System. It is the tax depreciation framework that governs how US businesses recover the cost of most tangible property over time through annual deductions on their federal tax return.

The word "accelerated" is the important part. Under MACRS, you generally claim larger depreciation deductions in the early years of an asset's life and smaller ones toward the end. This front-loading is intentional. It reduces your taxable income faster in the years when the asset is most valuable to your business and most productive.

MACRS replaced the earlier Accelerated Cost Recovery System (ACRS) when Congress passed the Tax Reform Act of 1986. Any tangible property your startup places in service after that date is subject to MACRS unless a specific exclusion applies.

The IRS outlines all MACRS rules in IRS Publication 946, titled "How to Depreciate Property." This is the authoritative reference document for any questions about recovery periods, depreciation methods, and the tables you use to calculate your annual deduction.

What MACRS does not cover?

Before going further, it helps to know what falls outside MACRS so you do not try to apply it to the wrong assets.

MACRS does not apply to intangible property such as patents, trademarks, or copyrights. Those are amortized under different rules, typically Section 197. MACRS also does not apply to property placed in service before 1987, certain films and recordings, and property acquired in certain nontaxable transfers. Your SaaS subscriptions, monthly software licenses, and other operating expenditures are expensed directly and are not depreciable assets at all.

For startups, the assets that do fall under MACRS are things like computers, servers, office furniture, laboratory equipment, manufacturing machinery, and vehicles used for business purposes.

The 2 MACRS systems: GDS and ADS

MACRS actually contains two separate depreciation systems. Most businesses use the first one and encounter the second only in specific situations.

General Depreciation System (GDS) is the standard system and the one almost all startups will use. GDS uses accelerated depreciation methods and shorter recovery periods, which means you get larger deductions earlier. For most personal property, GDS uses the 200% declining balance method, which is sometimes called double declining balance. For 15-year and 20-year property, GDS uses the 150% declining balance method. For real property such as commercial buildings, GDS uses the straight-line method over 27.5 years (residential rental) or 39 years (nonresidential real property).

Alternative Depreciation System (ADS) uses straight-line depreciation over longer recovery periods than GDS. ADS is required in specific circumstances: property used predominantly outside the United States, property leased to tax-exempt organizations, listed property used 50% or less for business, and property used in farming businesses under certain elections. In some cases, businesses voluntarily elect ADS for other planning reasons. For most early-stage startups, ADS is not something you will encounter unless you have overseas operations or specific lease arrangements.

The rule of thumb is, if you are a US-based startup buying equipment and furniture for domestic business use, you will almost always be using GDS.

MACRS recovery periods and property classes

Under MACRS, every asset is assigned to a property class based on its type. That property class determines the recovery period, which is the number of years over which you spread the depreciation deduction.

Here are the most relevant property classes for startups:

3-year property includes certain horses and property with a class life of four years or less under the Asset Depreciation Range (ADR) system. This class rarely comes up for tech startups.
5-year property covers computers and peripheral equipment, office machinery such as calculators and copiers, automobiles, light trucks, and research and experimentation equipment. For most SaaS and tech startups, the laptops, servers, and development equipment you buy fall into this category.
7-year property is the default class for any property that does not have a specific class life or assigned class elsewhere. Office furniture, fixtures, and most general-purpose business equipment fall here. If you cannot find your asset in the IRS asset class tables in Publication 946, it defaults to 7-year property.
15-year property includes certain land improvements such as fencing, roads, and qualified improvement property (QIP), which covers interior improvements to nonresidential buildings.
27.5-year property is residential rental real estate, depreciated using straight-line.
39-year property is nonresidential real property, also straight-line.

For a typical early-stage startup spending on computers, office equipment, and furniture, you are almost entirely dealing with 5-year and 7-year property under GDS.

MACRS depreciation conventions

Before you calculate a depreciation deduction, you also need to apply a "convention." A convention is an IRS rule that determines when your recovery period is treated as beginning and ending in the year you place the asset in service and the year you dispose of it.

There are three conventions under MACRS:

Half-year convention is the default for most personal property. Under this convention, the IRS treats all property placed in service during the year as if it were placed in service at the midpoint of the year, regardless of the actual date. This means you claim only half a year of depreciation in year one, even if you bought the asset in January. The practical effect is that a 5-year property actually spans six tax years on your depreciation schedule, because the half year at the start and the half year at the end together account for the one full year of depreciation that the convention delays.

Mid-quarter convention replaces the half-year convention if more than 40% of the total depreciable basis of all personal property placed in service during the year was placed in service in the last three months of the tax year. If your startup has a heavy fourth-quarter spending pattern on equipment, test whether the mid-quarter convention applies before filing. Using the wrong convention is one of the most common MACRS errors in practice.

Mid-month convention applies to real property only. It treats all real property placed in service during a given month as placed in service at the midpoint of that month.

How to calculate MACRS depreciation?

The IRS provides percentage tables in IRS Publication 946 (Appendix A, Tables A-1 through A-20) that give you the exact depreciation rate to apply to your asset's cost basis for each year of its recovery period. These tables already incorporate the depreciation method (200% or 150% declining balance, switching to straight-line) and the half-year convention.

To calculate your annual MACRS deduction, you multiply the asset's depreciable basis by the percentage from the applicable table for that year.

Here is a worked example using 7-year property and the half-year convention, based on the IRS GDS Table A-1 rates from Publication 946:

Suppose your startup purchases $50,000 of office furniture in 2026. Office furniture is a 7-year property. Under the half-year convention, the IRS percentage rates are approximately:

Year 1: 14.29% multiplied by $50,000 equals $7,145

Year 2: 24.49% multiplied by $50,000 equals $12,245

Year 3: 17.49% multiplied by $50,000 equals $8,745

Year 4: 12.49% multiplied by $50,000 equals $6,245

Year 5: 8.93% multiplied by $50,000 equals $4,465

Year 6: 8.92% multiplied by $50,000 equals $4,460

Year 7: 8.93% multiplied by $50,000 equals $4,465

Year 8: 4.46% multiplied by $50,000 equals $2,230

Notice that the schedule runs for eight tax years despite being called "7-year property." That is the half-year convention in action. After just two years, you have already recovered about 38.78% of the cost. By year four, you have recovered more than two-thirds.

You report this depreciation on Form 4562 (Depreciation and Amortization), which is filed with your annual tax return.

Section 179: The immediate expensing option

MACRS is the default, but many startups can do better than spreading a deduction over five or seven years. Section 179 of the Internal Revenue Code allows businesses to immediately deduct the full cost of qualifying property in the year it is placed in service, instead of depreciating it over the MACRS recovery period.

For 2026, the Section 179 deduction limit is $2,560,000. The phase-out begins once total qualifying property placed in service during the year exceeds $4,090,000, and the deduction is eliminated entirely at $6,650,000. Both thresholds are adjusted annually for inflation.

Qualifying property for Section 179 includes tangible personal property used in a trade or business, computers and peripheral equipment, off-the-shelf software available to the general public under a nonexclusive license, and qualified improvement property. Note that SaaS subscriptions do not qualify because they are not purchased property and are treated as operating expenses.

There is one important limitation: the Section 179 deduction cannot exceed your business taxable income for the year. You cannot use Section 179 to create a net operating loss. Any excess deduction carries forward to future years. This is a meaningful constraint for pre-revenue or early-revenue startups, which is why it is worth understanding how Section 179 interacts with bonus depreciation.

For heavy SUVs with a gross vehicle weight rating between 6,000 and 14,000 pounds, the maximum first-year Section 179 deduction is capped at $32,000 in 2026.

Bonus depreciation: The 100% first-year deduction

Bonus depreciation is a separate first-year deduction that applies on top of, or instead of, MACRS and Section 179. Unlike Section 179, bonus depreciation can create a net operating loss, which makes it particularly useful for startups that are investing heavily in the early years when taxable income may be low or negative.

The history of bonus depreciation over the past few years has been turbulent. Under the Tax Cuts and Jobs Act of 2017, 100% bonus depreciation applied to qualifying property placed in service from 2018 through 2022. Congress then scheduled a gradual phase-down: 80% in 2023, 60% in 2024, 40% in 2025 (pre-OBBBA), and further reductions after that.

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, reversed the phase-down entirely. The OBBBA permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This is one of the most significant tax changes affecting capital-intensive startups in recent years.

To qualify for bonus depreciation, the property must have a MACRS recovery period of 20 years or less, must be placed in service during the tax year (not merely ordered), and must not be acquired from a related party. Both new and used property qualify, as long as the used property is new to the taxpayer and was not previously used by the taxpayer's business.

For passenger automobiles with a gross vehicle weight rating under 6,000 pounds, bonus depreciation is subject to the luxury auto limits under IRC Section 280F. For 2026, the combined first-year depreciation cap including bonus depreciation for these vehicles is approximately $20,400.

How section 179 and bonus depreciation work together in 2026?

For 2026, the combination of Section 179 and 100% bonus depreciation means that most qualifying assets can be fully deducted in the year they are placed in service.

The IRS requires Section 179 to be applied first, then bonus depreciation, and then regular MACRS on any remaining basis. When both Section 179 and 100% bonus depreciation are available, there is often no residual basis left for regular MACRS in year one.

Here is a practical example. Your startup purchases $120,000 of computers, servers, and office equipment in 2026, all qualifying 5-year or 7-year property. You elect Section 179 for the full amount. As long as your business taxable income equals or exceeds $120,000, you deduct the entire $120,000 in 2026. There is nothing left to depreciate in future years.

If your business income is lower, say $80,000, Section 179 is capped at $80,000 and the remaining $40,000 carries forward. Alternatively, you could elect 100% bonus depreciation on the full $120,000, which can create a net operating loss that carries forward to offset future income.

For most early-stage startups where income is growing and tax planning matters, the decision between Section 179 and bonus depreciation depends on your current-year income level and how you want to manage deductions over the next few years. This is the kind of decision worth discussing with your accountant before you file.

The mid-quarter convention trap: A common startup mistake

One of the most practically important MACRS rules that founders miss is the mid-quarter convention trigger.

If more than 40% of the total depreciable basis of all personal property you place in service during the year falls in the last three months of the tax year, the mid-quarter convention replaces the half-year convention for all personal property placed in service that year. Not just the Q4 assets. All of them.

This matters for startups that spend heavily at year-end on equipment, servers, or furniture, which is common when founders try to maximize deductions before December 31. If a large Q4 purchase pushes your Q4 spending past the 40% threshold, every asset you placed in service during the year gets recalculated under the mid-quarter convention, changing your first-year depreciation rates for everything.

The practical fix is to run the 40% test before making significant Q4 capital expenditures. If you are close to the threshold, it may make more sense to push a purchase into January of the next year, or to accelerate an earlier purchase into Q3 to reduce the Q4 concentration.

How MACRS interacts with your books: Tax depreciation vs book depreciation

Here is something that confuses a lot of founders when they first encounter it: the depreciation you calculate for tax purposes under MACRS is almost always different from the depreciation you record in your financial statements.

Your financial statements follow GAAP (Generally Accepted Accounting Principles), which require you to depreciate assets over their actual useful economic life using methods like straight-line depreciation. Your tax return uses MACRS, which assigns standardized recovery periods and uses accelerated methods regardless of actual useful life.

This creates what accountants call a "temporary timing difference." In the early years of an asset's life, your tax depreciation is typically higher than your book depreciation, which means your taxable income is lower than your book income. Over time, the positions reverse as tax depreciation slows down.

This difference is tracked on your books through deferred tax assets and deferred tax liabilities. Investors reviewing your financial statements at Series A due diligence will expect to see these properly recorded. The reconciliation between book income and taxable income appears on Schedule M-1 of your corporate tax return (Form 1120), which is one of the first things an IRS examiner looks at.

If you have been using the same depreciation method for both tax and book purposes, which is technically incorrect, and you want to fix it, the vehicle for making that change officially is Form 3115 (Application for Change in Accounting Method).

What changed in 2025 and 2026: The OBBBA updates

The One Big Beautiful Bill Act introduced the most significant depreciation changes in several years. Here is a summary of what changed and what the current numbers are:

The OBBBA permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. Under the TCJA phase-down that the OBBBA reversed, bonus depreciation was 80% in 2023, 60% in 2024, and was scheduled to drop to 40% in 2025, 20% in 2026, and 0% from 2027 onward. Property placed in service between January 1 and January 19, 2025, and property acquired on or before January 19, 2025 even if placed in service later, remains subject to the prior 40% rate under the TCJA schedule. If your startup made equipment purchases in that early January 2025 window, the OBBBA does not apply retroactively to those specific assets.

The Section 179 deduction limit increased from $1,220,000 in 2024 to $2,500,000 for 2025, and the inflation-adjusted amount for 2026 is $2,560,000. The phase-out threshold increased from $3,050,000 in 2024 to $4,000,000 for 2025, with the 2026 inflation-adjusted threshold at $4,090,000.

Qualified Improvement Property (QIP) remains a 15-year MACRS property class and is eligible for bonus depreciation. If you make interior improvements to a commercial space you use for your startup, these improvements can qualify for the full 100% bonus deduction.

If your startup filed a 2024 or early 2025 return using the pre-OBBBA reduced bonus depreciation percentages for qualifying property placed in service after January 19, 2025, you may be able to correct this through an amended return or an accounting method change under Form 3115, depending on your specific situation. The IRS issued Notice 2026-11 addressing this transition. It is worth reviewing with your accountant if you made significant asset purchases in early-to-mid 2025 under the old rates.

MACRS for India-US startups: A few extra considerations

If you are an Indian founder operating a Delaware C-Corp with an Indian subsidiary, MACRS applies only to the US entity's assets. Your Indian subsidiary's assets are depreciated under Indian tax law, which uses a written-down value (WDV) method with rates prescribed by the Income Tax Act, 1961. These are completely separate systems.

Where this gets relevant to your US filings is in two areas.

First, if your Indian subsidiary purchases assets that are then used by the US entity in its operations, you need to be careful about which entity claims the depreciation and how the asset is characterized for both US and Indian tax purposes. Getting this wrong creates transfer pricing complications.

Second, the US entity's MACRS depreciation schedule affects your Schedule M-1 book-to-tax reconciliation, which is part of your Form 1120. If your US entity has intercompany transactions with your Indian subsidiary, the timing of income recognition affected by depreciation elections on the US side can affect how income is allocated for transfer pricing purposes.

These are not issues that require special alarm, but they are worth flagging when your tax advisor is preparing your US return alongside your transfer pricing documentation.

Conclusion

Depreciation is not just an accounting formality. For a startup that is actively investing in computers, equipment, and infrastructure, the combination of MACRS, Section 179, and 100% bonus depreciation under the OBBBA means you can often deduct the full cost of those assets in the year you buy them, rather than spreading the deduction over five to seven years.

The key decisions your accountant will help you make are: whether to elect Section 179, bonus depreciation, or standard MACRS for each asset category; whether the mid-quarter convention applies to your year-end spending pattern; and how to record the resulting book-to-tax difference on your financial statements so your books are clean for investors and due diligence.

Getting these decisions right from the start is significantly easier than fixing them later through an accounting method change under Form 3115.

Managing depreciation schedules, book-to-tax differences, and year-end tax planning across a growing startup asset base is exactly the kind of work that Inkle handles.

Book a demo with Inkle to see how we keep your books investor-ready and your tax position optimized year-round.