macrs depreciation

MACRS Depreciation The Tax Reform Act of 1986 replaced the Accelerated Cost Recovery System (ACRS) with Modified Accelerated Cost Recovery System (MACRS).� Here are some facts about MACRS. MACRS is a depreciation method that is used only for income tax purposes.� The methods in your text are for financial accounting purposes according to Generally Accepted Accounting Principles.� Nevertheless, MACRS bears a striking resemblance to the DDB depreciation method. Under MACRS, all depreciable assets are assigned to a class.� Here are typical classes: Class Typical Assets Depr. Method3-year Small tools, tractors, horses, specialized mfg. 200% Decl. Bal.

Devices.5-year Computers, autos, light trucks, small aircraft, 200% Decl. Bal.

Construction equipment, research and develop-Ment property.

7-year Office furniture, fixtures and equipment, com- 200% Decl. Bal.Mercial aircraft, and most machinery.

10-year Specialized heavy mfg. Machinery, mobile 200% Decl. Bal.Homes.

15-year Billboards, service station buildings, and tele- 150% Decl. Bal.Phone equipment

20-year Sewer pipes, most utility property, land improve- 150% Decl. Bal.ments

27.5 year Residential real estate property Straight Line31.5 year Office and other non-residential real estate Straight Line

property  There are tax rules that determine the assets basis, which is usually the assets cost.� Salvage value is not taken into consideration the law allows you to fully depreciation the entire cost of the asset!� However, as you might expect, there is a catch.� MACRS follows the half-year convention you only get one-half year of depreciation in the first year of ownership regardless of when you purchased the asset during the year.� 

How much depreciation do you get to take in year 1 if you purchased the asset on November 20?� One-half year. How much depreciation do you get to take in year 1 if you purchased the asset on January 1?� One-half year.� Calculating MACRS DepreciationIt’s easy to calculate your depreciation amount each year.� Simply look up the table value� from the table, and then multiply the value * the asset’s cost.� Here’s a partial table: MACRS DEPRECIATION BY CLASS OF PROPERTY Year 3-year 5-year 7-year 10-year 15-year 20-year1 33.33% 20.00% 14.29% 10.00% 5.00% 3.750%2 44.45 32.00 24.49 18.00 9.50 7.2193 14.81* 19.20 17.49 14.40 8.55 6.6774 7.41 11.52 12.49 11.52 7.70 6.1775 11.52 8.93* � 9.22 6.93 5.7136 � 5.76 8.92 � 7.37 6.23 5.2857 8.93 � 6.55* 5.90* 4.8888 4.46 � 6.55 5.90 4.5229 � 6.56 5.91 4.46210 � 6.55 5.90 4.46111 � 3.28 5.90 4.45212 5.90 4.46113 5.91 4.46214 5.90 4.46115 5.91 4.46216 2.95 4.46117 4.46218 4.46119 4.46220 4.46121 2.231

 *Switch over to straight line because straight line will provide a higher depreciation amount. How much depreciation would you get to take each year for a $10,000 light truck?� Here’s the calculation: Year MACRS Calculation Amount

1 10,000 * .20 $2,0002 10,000*.32 $32003 10,000 *.192 $19204 10,000*.1152 $11525 10,000*.1152 $11526 10,000*.0576 $576

 In the example above, what is the total amount of MACRS depreciation for this asset (add up the right column)? Over how many years will you actually depreciate this 5-year asset? Using DDB depreciation (as discussed in your textbook), the write-off for a 5-year asset would use a 40% rate (SL rate is 1/5 and double it to 40%).� Why does MACRS only allow a 20% write-off for a 5-year asset in year 1?