CPA REG: Depreciation, MACRS, and Section 179
Complete guide to depreciation methods for the CPA REG exam including MACRS conventions, Section 179 expensing, bonus depreciation, and listed property rules.
Depreciation for the CPA REG Exam
Depreciation allows taxpayers to recover the cost of tangible property used in a trade or business or held for the production of income. The Modified Accelerated Cost Recovery System (MACRS) is the primary depreciation method for tax purposes. Combined with Section 179 expensing and bonus depreciation, these rules form one of the most heavily tested areas on the REG exam.
MACRS Overview
MACRS applies to tangible property placed in service after 1986. Under MACRS, the depreciable basis is recovered over a prescribed recovery period using a specified depreciation method and convention. Land is never depreciable. The depreciable basis is the cost of the asset minus any Section 179 deduction and bonus depreciation claimed.
The two MACRS depreciation systems are the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS is the default and uses shorter recovery periods with accelerated methods. ADS uses straight-line depreciation over longer recovery periods and is required for certain property types, including property used predominantly outside the United States and tax-exempt use property.
Recovery Periods and Methods
Common GDS recovery periods include: 3-year property (tractor units, racehorses), 5-year property (automobiles, computers, office machinery, research equipment), 7-year property (office furniture, fixtures, most machinery and equipment), 15-year property (land improvements such as sidewalks, fencing, and parking lots), 27.5-year property (residential rental real property), and 39-year property (nonresidential real property).
Personal property (3, 5, 7, 10, 15, and 20-year property) uses the 200% declining balance method (switching to straight-line when advantageous) under GDS. The 150% declining balance method applies to 15 and 20-year property. Real property (27.5 and 39-year) always uses straight-line depreciation.
MACRS Conventions
Conventions determine the amount of depreciation allowed in the year the property is placed in service and disposed of. The half-year convention applies to personal property and treats all property as placed in service at the midpoint of the year, regardless of the actual date. The mid-month convention applies to real property and treats it as placed in service at the midpoint of the month.
The mid-quarter convention replaces the half-year convention when more than 40% of the aggregate basis of all personal property placed in service during the year is placed in service during the last quarter. Under the mid-quarter convention, property is treated as placed in service at the midpoint of the quarter in which it is actually placed in service. This anti-abuse rule prevents taxpayers from loading asset purchases into the end of the year to maximize first-year depreciation under the half-year convention.
Section 179 Expensing (IRC Section 179)
Section 179 allows taxpayers to elect to expense the cost of qualifying property in the year placed in service rather than capitalizing and depreciating it. The maximum deduction is adjusted annually for inflation (it was $1,160,000 for 2023). The deduction begins to phase out dollar-for-dollar when total qualifying property placed in service exceeds the investment threshold ($2,890,000 for 2023).
Qualifying property includes tangible personal property, off-the-shelf computer software, qualified real property (including HVAC, roofs, fire protection, alarm systems, and security systems for nonresidential real property), and certain improvements to nonresidential real property. The Section 179 deduction cannot exceed the taxpayer's taxable income from active trades or businesses (aggregated across all activities). Any disallowed amount carries forward indefinitely.
Bonus Depreciation (IRC Section 168(k))
Bonus depreciation allows an additional first-year deduction for qualifying new and used property. Under the TCJA, 100% bonus depreciation was available for property placed in service after September 27, 2017, through December 31, 2022. The rate phases down by 20% per year: 80% for 2023, 60% for 2024, 40% for 2025, and 20% for 2026. Qualifying property must have a recovery period of 20 years or less, be MACRS property, and meet the original use requirement (waived under TCJA for used property).
Unlike Section 179, bonus depreciation has no dollar limit, no investment ceiling, and no taxable income limitation. It can create or increase a net operating loss. Property with the longest production period and certain aircraft may qualify for extended bonus depreciation timelines.
Listed Property (IRC Section 280F)
Listed property includes passenger automobiles, entertainment and recreational property, and computers (unless used exclusively at a regular business establishment). If business use of listed property is 50% or less, the taxpayer must use ADS straight-line depreciation and cannot claim Section 179 or bonus depreciation. If business use drops to 50% or less in any subsequent year, excess depreciation must be recaptured as ordinary income.
Luxury automobile depreciation is subject to annual dollar caps. These caps limit the total depreciation (including Section 179 and bonus depreciation) that can be claimed each year on a passenger automobile. The specific dollar amounts are adjusted annually and are frequently tested.
Exam Tips
- Know the order of deductions: Section 179 first, then bonus depreciation, then regular MACRS on the remaining basis
- Remember the 40% rule that triggers the mid-quarter convention
- Section 179 is limited to taxable income; bonus depreciation is not
- Real property is never eligible for bonus depreciation (except qualified improvement property)
- Watch for listed property business-use percentage requirements
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