Question

Whar is MACRS Depreciation and how it is calculated

Answer 1

MACRS stands for modified accelerated cost recovery system. It is the current system allowed in the United States to calculate tax deductions on account of depreciation for depreciable assets (other than intangible assets). IRS Form 4562 is used to claim depreciation deduction.

It allows a larger deduction in early years and lower deductions in later years when compared to the straight-line method.

There are two sub-system of MACRS: the general depreciation system (GDS) and alternate depreciation system (ADS). GDS is the most relevant and is used for most assets.

Formulas

Depreciation in 1st Year =
Cost ×	1	× A × Depreciation Convention
Useful Life

Depreciation in Subsequent Years =
(Cost − Depreciation in Previous Years) ×	1	× A
Recovery

Where,
A is 100% or 150% or 200%.

However, where the depreciation calculated using the above formula is lower than depreciation under straight line method, the straight line depreciation for the previous year is taken as the relevant depreciation deduction for the rest of the recovery period.

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