MACRS is a US tax depreciation system that divides assets into classes and uses a double declining balance method to expedite write-offs. It allows for a mid-year convention and is calculated using IRS tables. Companies can use MACRS for tax purposes and other methods for financial statements. Real estate has its own classes. The IRS allows only one change in depreciation method during the life of an asset.
MACRS depreciation is the cost recovery modified accelerated depreciation system. This depreciation method was implemented as part of the US Tax Reform Act of 1986. MACRS depreciation divides fixed assets into classes that define the useful life and depreciation period and uses a double depreciation method. declining balance
The intent of MACRS depreciation is to allow asset owners to expedite the write-off of assets for tax purposes. Higher depreciation claimed on a tax return reduces earnings and the resulting tax due on those earnings. Companies can use MACRS for tax purposes and other depreciation methods in financial statements. These depreciation methods spread depreciation over longer periods of time, resulting in lower expenses and a higher level of profit reported in the financial statements.
To accommodate different purchase dates during a fiscal year, the MACRS depreciation method provides what is called a mid-year convention. This means that no matter when an asset is purchased during a fiscal year, the business can depreciate half a year’s worth of that asset. Thus, depreciation for an asset with a useful life of five years is actually reported for six years, half a year in the first year, a full year in the next four years, and the remaining half year in the sixth year.
Assets are classified into classes of three, five, seven, ten, 15 and 20 years, excluding real estate. Real estate is classified into 27.5-year or 39-year classes. The US Internal Revenue Service specifies which assets must be included in each class.
MACRS depreciation is calculated using the double-declining-balance method, using depreciation that is exactly twice straight-line depreciation. With straight-line depreciation, an asset with a useful life of five years will depreciate 20% each year. Under MACRS depreciation, the first year’s depreciation will be 40%; However, since the half-year convention applies, the actual depreciation is only 20%. In the second year, the remaining 80% value of the asset, that is, the original value minus the 20% depreciation from the first year, is depreciated by 40%, or 32% of the asset’s original value. The same procedure is applied during the third, fourth, and fifth years, with the final half-year depreciation recorded in the sixth year.
The Internal Revenue Service allows a change in depreciation methods only once during the life of the asset. The MACRS depreciation calculation includes the assumption that the company will switch to straight-line depreciation at a time when it is advantageous to do so. The depreciation percentages included in the MACRS tables reflect this calculation. A detailed discussion of MACRS depreciation can be found in IRS Publication 946, which includes asset class lists and depreciation tables.
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