How to Use MACRS Depreciation

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MACRS (modified asset cost recovery system) method is used for income tax purposes and is the accelerated depreciation methodology required by the United States. Unlike the straight-line method, which requires estimations for salvage value of the asset and its useful life, MACRS is based on a percentage chart published by the IRS.

Look up your MACRS percentage on a table. The IRS publishes these tables in Appendix A of IRS Publication 946 (see Resources).

Look up the percentage by the depreciation rate of recovery and depreciation year. Let's use a $10,000 copy machine purchased for a five-year property.

Go to the table for five year property and the following percentages are used: year 1 at 20 percent, year 2 at 32 percent, year 3 at 19.20 percent, years 4 and 5 at 11.52 percent; and, the final year 6 at 5.76 percent.

MACRS Tables

Calculate yearly depreciation. Take year 1 depreciation and multiply by $10K [$10,000 * .20 (Year 1 MACRS depreciation percentage)]. In year 2 you would write off $10,000 * .32 (year 2 MACRS depreciation percentage), and so on until you've written the entire value of the copy machine off at the end of year 6.

Download Form 4562 from the IRS website. Enter the information from Step 3 for the current tax year, in Part III, 19b.

Recapture depreciation. Disposition of the asset must be captured as a gain and included in ordinary income. See IRS Publication 544 for specific details.

Tips

  • Step 4 help: MACRS depreciation assumes that assets are purchased mid-year and therefore depreciate mid year. There is no salvage value.

Warnings

  • This is not to be construed as tax advice.