Rev. Proc. 87-56

Where this comes from

The Tax Reform Act of 1986 created MACRS, the Modified Accelerated Cost Recovery System. MACRS is the depreciation system that assigns each asset a recovery period, which is the number of years you spread the write-off over.

MACRS needed a master table to tell taxpayers which assets get which lives. The IRS published that table in Revenue Procedure 87-56 in 1987. Almost forty years later, it is still the controlling list. The IRS reprints the same tables in Publication 946, its plain-language depreciation guide.

What it established

The procedure splits all depreciable assets into two big groups. Asset classes 00.11 through 00.4 cover specific kinds of assets used in any business, such as office furniture, computers, cars, and land improvements. Asset classes 01.1 through 80.0 cover assets used in particular business activities, from farming to retail to manufacturing.

Two classes do a lot of work in cost segregation. Class 00.3, land improvements, carries a 15-year MACRS life and picks up things like paving, fencing, and site landscaping. Class 57.0, distributive trades and services, carries a 5-year life and covers assets used in retail and service businesses.

When one asset could fit both a general class and an activity class, the Tax Court held in Norwest Corp. (111 T.C. 105 (1998)) that the general asset class controls.

How it shows up in a study

Every line item a study moves to a shorter life has to land in a specific Rev. Proc. 87-56 class. The study first decides whether a part is personal property or a land improvement under the section 1245 rules and the case law. Then it cites the class that sets the recovery period, such as 5, 7, or 15 years.

On exam, the class citation is the first thing a reviewer can check. A study that names the class for each asset group gives the examiner a clean trail. A study that just says five-year property without a class cite does not.

What it does not mean

The table does not decide whether something is personal property in the first place. That question comes from section 1245, the old investment credit regulations, and cases like Whiteco and Hospital Corporation of America. Rev. Proc. 87-56 only assigns the life after that call is made.

The lives are also not a menu. You cannot pick a shorter class because you like it better. The asset has to actually fit the class description, and the general-over-activity rule from Norwest limits creative class shopping.