MACRS Special Depreciation Allowances
The Modified Accelerated Cost Recovery System (MACRS) provides special depreciation allowances for specific assets, such as racehorses and technology equipment.
Horses
The following are the recovery periods for horses:
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Any race horse placed in service after December 31, 2021 which is over two years old when placed in service (Code Sec. 168(e)(3)(A)(i)(II); Asset Class 01.223).
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Any race horse placed in service before January 1, 2022 regardless of age when placed in service ( Code Sec. 168(e)(3)(A)(i)(I));
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Any horse other than a race horse that is more than 12 years old when placed in service ( Code Sec. 168(e)(3)(A)(ii); Asset Classes 01.222 and 01.224).
Horses not described above fall into the 7-year recovery period (Asset Class 01.225).
Computer Software
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Purchased Software - Generally the costs of acquiring computer software must be capitalized, including the costs of acquiring readily available software, and amortized over 3 years (Reg. Sec. 1.263(a)-4(c)). Software amortized over 3 years qualifies for bonus depreciation (Sec 168(k)(2)(A)).
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Software Acquired with Business - Software that is acquired in connection with the acquisition of a trade or business is generally an amortizable intangible under Sec 197 and as such is amortized over 15 years.
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Special Rule for Off-the-Shelf Software – Taxpayers have the option of expensing off-the-shelf software under Sec 179.
Bundled Software
Software included in the cost of hardware or other tangible property is treated as part of the cost of the hardware or other tangible property and depreciated under the rules applying to that hardware or other property, generally 5-year MACRS.
Self-Developed Software
The costs of developing computer software (other than Sec 197 Intangibles) can be recovered in one of the following ways:
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Consistently expensed currently (Sec 174(a)), or,
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Consistently treated as capital expenditures amortized for 60 months from the date of completion of the development (Sec 174(b)), or,
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Amortized over 36 months from the date the software is placed in service (Sec 167(f)(1)).
Costs of developing software may also qualify as research and experimental expenditures under Code Sec. 174.
Farm Equipment
For property placed in service after Dec. 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which commences with the taxpayer. IRC Sec. 168(e)(3)(B)(vii) as amended by TCJA Sec. 13203(a) The required use of the 150% declining balance depreciation method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. Thus the 200% declining balance method can be used.
The 150% declining balance method continues to apply to any 15-year, or 20-year property used in the farming business to which the straight-line method does not apply, and to property for which the taxpayer elects the use of the 150% declining balance method. IRC Sec. 168(b)(2) as amended by TCJA Sec. 13203(b)
Trailer Depreciation
A trailer that includes kitchen, bathroom and sleeping facilities is rented long term to an unrelated party for use as their primary residence. What is the depreciable life of that trailer? Is it 5 years or 27.5 years?
A 27.5-year class is assigned to residential rental property (Sec 168(c)). Residential rental property is defined as a building or structure of which 80% or more of the gross rental income is from dwelling units. A dwelling unit is a house or apartment that provides living accommodations in a building or structure, but doesn't include a unit in a hotel, motel, or other establishment more than half of the units in which are used on a transient basis (Sec 168(e)(2)(A)). Otherwise-qualifying residential rental property can include manufactured homes, and, if permanently anchored, mobile homes.
The five-year MACRS class includes depreciable personal property with a class life of more than four years and less than ten years (Code Sec. 168(e)(1)), such as information systems (computers); heavy general purpose trucks; trailers and trailer-mounted containers; breeding or dairy cattle; and certain assets used in the drilling of oil and gas wells, construction, the manufacture of textile yarns, apparel, and other finished goods and the cutting of timber.
Whether a trailer is 1245 or 1250 property was also addressed in Rev Ruling 77-291. In that Revenue Ruling, the determination depended on the way the trailers are attached to the land and on how permanently the property is designed to remain in place, i.e., whether they are buildings. Where the property isn't affixed to the land and remains at all times movable, it is considered 1245 property.
So, whether the property is 5-year-life property or 27.5-year-life property seems to hinge on whether the trailer is permanently anchored in place (27.5-year life) or remains mobile (5-year life).