MACRS Depreciation

Written by Fmi.Online Tuesday September 28, 2021
MACRS depreciation or Modified Accelerated Cost Recovery System depreciation is an accounting procedure designed for tax purposes that depreciates a given asset in an accelerated manner. This is a technique established by the U.S. Government that allows businesses to depreciate assets rapidly during its first years.

Explanation :

The Modified Accelerated Cost Recovery System, also known as MACRS, was approved by the U.S. Congress through the Tax Reform Act of 1986 and it took the place of the previously established Accelerated Cost Recovery System (ACRS). This system allows the business or asset owner to deduce a big portion of the asset’s value during the first years of its useful life. To calculate depreciation properly through MACRS there are three important steps to take: first, to figure out the class of the property, according to the classification established by the Internal Revenue Service (IRS).After that, the depreciation convention must be identified, depending on the treatment that should be given to the asset, according to the IRS. Finally, the depreciation method employed must be selected. There are three methods available for the MACRS, which are: 150% declining balance, 200% declining balance and the straight-line method. The Internal Revenue Service provides a full explanation on how depreciation charges should be calculated on its official website, which is a particularly useful tool for accountants and business owners.

In a nutshell :

  • The modified accelerated cost recovery system (MACRS) allows a business to recover the cost basis of certain assets that deteriorate over time.
  • The IRS provides guidelines on which assets are eligible for MACRS and what useful life figure should be used.
  • MACRS allows for faster depreciation in the first years of an asset's life and slows depreciation later on.
  • From a tax perspective, MACRS depreciation is more beneficial compared to some other methods.
  • There are two types of MACRS systems—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).
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