What is MACRS depreciation?
MACRS depreciation is the depreciation system used for taxes in the United States. Given the importance of depreciation for reducing your tax bill, its imperative to have a robust understanding of the MACRS depreciation method. Read on for a little more information on how to complete a MACRS depreciation calculation. MACRS depreciation explained  MACRS  which stands for Modified Accelerated Cost Recovery System  is the tax depreciation system used in the U.S. In other words, MACRS depreciation is the system used to calculate your businesss tax deductions based on the depreciation of your tangible (depreciable) assets. The MACRS depreciation method allows for larger deductions in the early years of an assets life, and lower deductions in later years. This contrasts significantly with straight-line depreciation, wherein you claim the same tax deduction each year, until the end of the assets usable life. How to do a MACRS depreciation calculation  Using MACRS depreciation is relatively simple, so weve put together a step-by-step guide to help you get started with your MACRS depreciation calculation:  Firstly, you need to determine the basis of the calculation, i.e., the original value of the asset. This includes the purchase price, the sales tax, shipping costs, installation costs, and any other costs associated with the purchase. Next, you need to determine your propertys class. The IRS classifies depreciable assets into different types based on the term of their useful life. The IRS provides a full explanation of property classes in IRS Pub 946, but heres a simplified guide that you can use as well: Class Typical assets Depreciation method 3-year Tractors, racehorses (over 2 years old), qualified rent-to-own properties, etc. 200% declining balance 5-year Automobiles, office machinery, computers, etc. 200% declining balance 7-year Office furniture, agricultural machinery, railroad tracks, etc. 200% declining balance 10-year Water transportation equipment, single-purpose agricultural structure, tree or vine-bearing fruits, etc. 200% declining balance 15-year Land improvements, municipal wastewater treatment plants, electric transmission properties, etc. 150% declining balance 20-year Farm buildings, municipal sewers, etc. 150% declining balance 27.5-year Residential properties, etc. Straight-line depreciation 31.5-year Office and non-residential properties, etc. Straight-line depreciation Once youve determined the class, you need to work out your MACRS depreciation method, i.e., 200% declining balance, 150% declining balance, etc. You can find the appropriate depreciation method for your asset in the MACRS depreciation table above. Now, youll need to select the MACRS depreciation convention. This is essentially just whenever you began using the asset, i.e., mid-month, mid-quarter, or half-year. Now that youve got all the necessary information, you can work out the percentage of the assets value that youll be able to itemize as a deduction. To do that, you can use the following MACRS depreciation formulas:  1st Year Depreciation = Cost x (1 / Useful Life) x Depreciation Method x Depreciation Convention  and  Subsequent Years Depreciation = (Cost  Depreciation in Previous Years) x (1 / Recovery Period) x Depreciation Method  MACRS depreciation method example  To see how MACRS depreciation works in practice, lets take a look at an example. Imagine that Company A purchased some agricultural machinery for $150,000 in 2020. Assuming the half-year convention, we can begin our calculations using the MACRS depreciation table. Agricultural equipment is a 7-year property, and again, looking at the MACRS depreciation table, we know to use the 200% declining balance depreciation method. Using all this information, we can complete our MACRS depreciation calculation for the first year (2020):  $150,000 x (1 / 7) x 200% x 0.5 = $21,428.57  Then, we can complete the calculation for every subsequent year, i.e., heres the formula for 2021:  $150,000 - $21,428.57 x (1 / 7) x 200% = $36,734.69  We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.