IRC Section 168 — MACRS

Where this comes from

Before 1986, businesses used a patchwork of depreciation rules. The Tax Reform Act of 1986 replaced them with a single system: the Modified Accelerated Cost Recovery System, or MACRS. Section 168 is the statute that created it.

MACRS assigned every type of property to a recovery class and set a method and a convention for each class. It has been the standard since then. Cost segregation exists entirely within its framework.

What it established

Section 168 sets five numbers that matter most to building owners: 5-year, 7-year, 15-year, 27.5-year, and 39-year. Five-year and 7-year property use 200% declining balance. Fifteen-year uses 150% declining balance. The residential and nonresidential real property classes use straight-line.

A commercial building is 39-year property. That means its cost is spread over nearly four decades. But the building contains parts that belong to shorter classes. Specialty wiring, process plumbing, land improvements, and certain fixtures qualify as 5-year, 7-year, or 15-year property. A cost segregation study identifies those parts and moves them to the correct class.

Subsection (k) adds bonus depreciation on top. Property with a recovery period of 20 years or less, which is everything a study reclassifies, can qualify for a large first-year write-off. The acquisition date and the applicable law at that date determine the rate.

How it shows up in a study

Every line in a cost segregation report maps to a class under this statute. The engineer identifies the asset, traces it to the correct Rev. Proc. 87-56 class, and states the resulting recovery period. The study's output, a table of assets assigned to 5-year, 7-year, 15-year, and 39-year buckets, is a direct application of Section 168.

Subsections (f)(1) and (i)(6) prohibit component depreciation. A study does not do component depreciation. It classifies each asset into the right MACRS class at the time it is placed in service. The Hospital Corporation of America case confirmed that this is a permitted and distinct method.

What it does not mean

Section 168 does not guarantee that any particular component qualifies for a short life. The statute sets the class system; the classification rules in Rev. Proc. 87-56 and court cases like Whiteco and HCA determine which components belong in which class.

Bonus depreciation under subsection (k) is also not automatic. The property must be original use or new to the buyer, and the purchase must pass the related-party rules. The acquisition date controls which rate applies.