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
3-year

Typical Assets
Small tools, tractors, horses, specialized mfg.
Devices.

Depr. Method
200% Decl. Bal.

5-year

Computers, autos, light trucks, small aircraft,

Construction equipment, research and developMent property.

200% Decl. Bal.

7-year

Office furniture, fixtures and equipment, comMercial aircraft, and most machinery.

200% Decl. Bal.

10-year

Specialized heavy mfg. Machinery, mobile

Homes.

200% Decl. Bal.

15-year

Billboards, service station buildings, and telePhone equipment

150% Decl. Bal.

20-year

Sewer pipes, most utility property, land improvements

150% Decl. Bal.

27.5 year

Residential real estate property

Straight Line

31.5 year

Office and other non-residential real estate

property

Straight Line

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 Depreciation

Its easy to calculate your depreciation amount each year. Simply look up
the table value from the table, and then multiply the value * the assets
cost. Heres a partial table:
MACRS DEPRECIATION BY CLASS OF PROPERTY
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21

3-year
33.33%
44.45
14.81*
7.41

5-year
20.00%
32.00
19.20
11.52
11.52
5.76

7-year
14.29%
24.49
17.49
12.49
8.93*
8.92
8.93
4.46

10-year
10.00%
18.00
14.40
11.52
9.22
7.37
6.55*
6.55
6.56
6.55
3.28

15-year
5.00%
9.50
8.55
7.70
6.93
6.23
5.90*
5.90
5.91
5.90
5.90
5.90
5.91
5.90
5.91
2.95

20-year
3.750%
7.219
6.677
6.177
5.713
5.285
4.888
4.522
4.462
4.461
4.452
4.461
4.462
4.461
4.462
4.461
4.462
4.461
4.462
4.461
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? Heres the calculation:
Year
1
2
3
4
5
6

MACRS Calculation
10,000 * .20
10,000*.32
10,000 *.192
10,000*.1152
10,000*.1152
10,000*.0576

Amount
$2,000
$3200
$1920
$1152
$1152
$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 5year 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?