IRC §168(b) — Applicable Depreciation Method

Where this comes from

The Tax Reform Act of 1986 created MACRS, the Modified Accelerated Cost Recovery System. MACRS replaced the older Accelerated Cost Recovery System (ACRS) and set up a new table of asset classes with specific recovery periods.

Congress built accelerated methods into MACRS from the start. The intent was to encourage investment by letting businesses recover costs faster. Section 168(b) is the provision that spells out which method applies to each class.

What it says

The 200 percent declining balance method applies twice the straight-line rate to the asset's remaining basis each year, then switches to straight-line when the switch produces a larger deduction. For a five-year asset, the straight-line rate would be 20 percent per year. The 200 percent method applies 40 percent to the remaining balance. In year one, roughly 40 percent of the cost flows through your return. By year three, the deductions slow down as the remaining balance shrinks.

For 15-year and 20-year property, the method is 150 percent declining balance with the same switch to straight-line rule. That is faster than straight-line but not as aggressive as the 200 percent method.

For residential rental property (27.5 years) and nonresidential commercial property (39 years), the method is straight-line only. Equal deductions, every year, for the full recovery period. No front-loading.

How it shows up in a study

When a cost segregation study moves a component from the 39-year class into the 5-year class, two things happen at once. First, the recovery window drops from 39 years to 5. Second, the method changes from straight-line to 200 percent declining balance. Both shifts push deductions into the early years.

On a straight-line 39-year schedule, you deduct about 2.5 percent of the cost each year. On a 200 percent declining balance 5-year schedule, you may deduct 38 to 40 percent of the cost in the first year before the switch to straight-line. That is the multiplier a study delivers, and this section is its statutory home.

When bonus depreciation applies and you take 100 percent in year one, Section 168(b) is technically still the underlying method, but bonus overrides it for that first year.

What it does not mean

Section 168(b) sets the method only after an asset is assigned to a class. It does not decide which class the asset belongs to. That comes from Section 168(c) for the recovery period and Revenue Procedure 87-56 for the specific asset class. A study that misassigns a component to a faster class gets a bigger method benefit, but it is wrong and creates audit risk.

The section also does not create the deduction itself. Section 168(a) is the operative provision that allows the depreciation deduction. Section 168(b) is the method rule that shapes how fast that deduction is taken.