MACRS is the standard U.S. tax depreciation system that assigns business assets to property classes (3-year, 5-year, 7-year, etc.) and front-loads deductions using a declining-balance method.
The Modified Accelerated Cost Recovery System (MACRS) is the depreciation method required by the IRS for most tangible business property placed in service after 1986. It assigns assets to recovery-period classes and applies an accelerated depreciation convention that takes larger deductions in early years, reducing current taxable income more than straight-line depreciation would. Common MACRS property classes: 5-year property includes computers, office equipment, vehicles, and research equipment; 7-year property includes office furniture, fixtures, and most machinery; 15-year property includes land improvements and certain leasehold improvements; 39-year property is non-residential real estate. The General Depreciation System (GDS) uses double-declining balance switching to straight-line; the Alternative Depreciation System (ADS) uses straight-line over longer lives and is required for certain property (foreign-use, tax-exempt bond financed, etc.). For lenders reading tax returns, MACRS depreciation is a non-cash expense that reduces reported net income below actual cash generation. This is why lenders often add back depreciation to arrive at cash-basis earnings — particularly when calculating DSCR or analyzing Schedule C filers. The IRS Publication 946 (https://www.irs.gov/publications/p946) is the authoritative IRS guide to MACRS property classes, recovery periods, and depreciation percentage tables. The IRS MACRS depreciation tables (Appendix A of Pub. 946) list the exact annual percentage deduction for each asset class.
MACRS uses an accelerated double-declining balance that takes larger deductions in early years, saving taxes now (time value of money). Straight-line spreads equal deductions across the recovery period. MACRS is required for most U.S. business tax purposes; straight-line is often used for GAAP book accounting.
Section 179 and bonus depreciation can eliminate most or all of the depreciable basis in year one. Any remaining basis after those deductions follows normal MACRS recovery for the remaining life. Apply deductions in order: Section 179 first, then bonus depreciation, then regular MACRS.
Yes, most lenders add back depreciation (and amortization) to net income to estimate cash flow. This is the 'D' in EBITDA. Since depreciation is a non-cash expense, it does not reduce your ability to service debt — lenders want the cash-basis picture.