Depreciation

EA Part 2 — Depreciation Exam: IRS Enrolled Agent — Part 2: Businesses Last Updated: June 2026 --- ## Overview of Depreciation Depreciation allows businesses to deduct the cost of tangible business property over its useful life. Key rule: Property must be: - Owned by the taxpayer - Used in business or for production of income - Have a determinable useful life of more than one year - Depreciable (land is NOT depreciable) --- ## MACRS — Modified Accelerated Cost Recovery System MACRS is the required depreciation system for most tangible business property placed in service after 1986. ### Property Classes | Recovery Period | Property Examples | |---|---| | 3-year | Race horses, certain tools | | 5-year | Cars, light trucks, computers, office equipment | | 7-year | Furniture, fixtures, most machinery, office furniture (most common default) | | 10-year | Water transportation equipment, single-purpose agricultural structures | | 15-year | Land improvements (fences, roads, landscaping), qualified improvement property | | 20-year | Farm buildings | | 27.5-year | Residential rental property (straight-line) | | 39-year | Nonresidential (commercial) real property (straight-line) | > Exam Tip: Residential rental = 27.5 years; commercial real = 39 years. These are straight-line only. ### MACRS Method by Class | Property Class | Method | Convention | |---|---|---| | 3-, 5-, 7-, 10-year | 200% declining balance (switch to SL when SL gives higher deduction) | Half-year | | 15-, 20-year | 150% declining balance (switch to SL) | Half-year | | 27.5- and 39-year | Straight-line only | Mid-month | Half-year convention: All personal property is treated as placed in service on July 1 of the tax year (regardless of…