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. Method

3-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 Line

 

 

 

31.5 year

Office and other non-residential real estate

Straight Line

 

property

 

 

 

There are tax rules that determine the asset’s basis, which is usually the asset’s 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 Depreciation

It’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-year

1

33.33%

20.00%

14.29%

10.00%

5.00%

3.750%

2

44.45

32.00

24.49

18.00

9.50

7.219

3

14.81*

19.20

17.49

14.40

8.55

6.677

4

7.41

11.52

12.49

11.52

7.70

6.177

5

 

11.52

8.93*

  9.22

6.93

5.713

6

 

  5.76

8.92

  7.37

6.23

5.285

7

 

 

8.93

  6.55*

5.90*

4.888

8

 

 

4.46

  6.55

5.90

4.522

9

 

 

 

  6.56

5.91

4.462

10

 

 

 

  6.55

5.90

4.461

11

 

 

 

  3.28

5.90

4.452

12

 

 

 

 

5.90

4.461

13

 

 

 

 

5.91

4.462

14

 

 

 

 

5.90

4.461

15

 

 

 

 

5.91

4.462

16

 

 

 

 

2.95

4.461

17

 

 

 

 

 

4.462

18

 

 

 

 

 

4.461

19

 

 

 

 

 

4.462

20

 

 

 

 

 

4.461

21

 

 

 

 

 

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

$2,000

2

10,000*.32

$3200

3

10,000 *.192

$1920

4

10,000*.1152

$1152

5

10,000*.1152

$1152

6

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 writeoff 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% writeoff for a 5-year asset in year 1?