Question

The IRS requires all firms to use its MACRS (Modified Accelerated Cost Recovery System) when recording depreciation expense for long-lived or fixed assets. MACRS includes pre-designated asset useful lives and accelerated depreciation methods. Congress / the IRS has required the use of MACRS to encourage corporate managers to buy new capital assets more frequently for the benefit of the economy. Explain whether you agree or disagree with the required use of MACRS.

Answer 1

MACRS Depreciation is the tax depreciation system that is currently employed in the United States. The MACRS, which stands for Modified Accelerated Cost Recovery System, was originally known as the ACRS (Accelerated Cost Recovery System) before it was rebranded to its current form after the enactment of the Tax Reform Act in 1986.

The Internal Revenue Service describes depreciation as an income tax deduction that businesses can use to recover the cost basis of certain assets. Depreciation is an annual deduction for assets that become obsolete, deteriorate, or are affected by wear and tear. It applies to both tangible (such as motor vehicles, machinery, buildings, etc.), as well as intangible assetsIntangible AssetsAccording to the IFRS, intangible assets are identifiable, non-monetary assets without physical substance. Like all assets, intangible assets are those that are expected to generate economic returns for the company in the future. As a long-term asset, this expectation extends beyond one year. (like patents, trademarks, and copyrights). MACRS serves as the most suitable depreciation method for tax purposes.

When purchasing an asset, the entire cost of that asset cannot be written off in the year of purchase. Instead, the IRS requires businesses to deduct a portion of the asset cost gradually over the number of years that the asset is expected to be used.

The MACRS depreciation method allows greater accelerated depreciation over the life of the asset. This means that the business can take larger tax deductions in the initial years and deduct less in later years of the asset’s life.

MACRS depreciation is not added in the balance sheet because it is not approved by GAAP. Instead, the approved method for calculating depreciation is straight line depreciation methodStraight Line DepreciationStraight line depreciation is the most commonly used and easiest method for allocating depreciation of an asset. With the straight line method, the annual depreciation expense equals the cost of the asset minus the salvage value, divided by the useful life (# of years). This guide has examples, formulas, explanations or other methods of accelerated cost depreciation