IRC §168(c) — Applicable Recovery Period

Where this comes from

When Congress created MACRS in the Tax Reform Act of 1986, it needed a system for assigning recovery periods to every depreciable asset. Section 168(c) is that system.

For most assets, the recovery period is found by looking up the asset in the tables published in Revenue Procedure 87-56. That revenue procedure organizes assets into general classes (like office furniture and computers) and activity classes (like assets used in hotels or retail). If an asset fits a specific class in those tables, that class sets the recovery period. If nothing fits, the default rule in Section 168(c) assigns a 7-year period.

What it says

The main recovery periods are 3, 5, 7, 10, 15, 20, 25, 27.5, and 39 years. Each corresponds to a type of property.

The most important ones for a cost segregation study are: 5-year (short-lived personal property such as carpet, specialty wiring, and some fixtures), 7-year (general personal property and other equipment), 15-year (land improvements such as parking lots, landscaping, fencing, and qualified improvement property), 27.5-year (residential rental property), and 39-year (nonresidential commercial real property).

Residential rental property at 27.5 years includes apartment buildings and similar structures. The building shell of an office, warehouse, strip mall, or hotel is at 39 years. Getting the class assignment right means matching the component to the right line in Revenue Procedure 87-56 or citing the default rule.

How it shows up in a study

The core technical work of a cost segregation study is assigning every identified component to the correct recovery period. Specialty electrical wiring for process equipment can be 5-year. Carpet and decorative lighting can be 5-year. A parking lot is 15-year. Fencing is 15-year. Qualified interior improvements can be 15-year. The building shell and load-bearing walls stay at 39 years.

Every one of those assignments traces back to Section 168(c) and the specific class in Revenue Procedure 87-56. A study that gets these assignments wrong does not just miss savings. It creates audit risk. The study's legal analysis section should cite the class for every component category it identifies.

What it does not mean

Section 168(c) sets the recovery period but does not decide whether something is personal property in the first place. That classification question comes from Section 1245 and the case law and regulations that define structural components. A component can qualify as personal property and still be assigned the wrong period if the class is chosen carelessly.

The section also does not address the depreciation method. That comes from Section 168(b), which sets the method (200 percent declining balance, 150 percent declining balance, or straight-line) separately from the period. A complete understanding of how a study works requires both.