Question

For tax purposes, which is the most common of the depreciation methods and explain how this depreciation method works. The choice of depreciation methods are as follows: Straight-line, double-declining balance, sum of the years digits, modified cost recovery system and units of production.

Answer 1

Correct answer is MACRS( Modified Accelerated cost recovery system)

The standard method of Depreciation for federal income tax purposes is called Modified Accelerated cost Recovery system. It begin with a declining balance method,then switch to a straight line schedule. It is a modification of the Accelerated Cost Recovery System,which was in use from 1981 to 1986.

MACRS Depreciation allows the capitalised cost of an asset to be recovered over a specified period via annual deductions. The MACRS puts fixed assets into classes that have set Depreciation peroied.

The IRS descibes Depreciation as an income tax deduction that businesses use to recover the cost basis of certain assets.

Working Of MACRS:-

There are two main Depreciation systems that taxpayers may use to depericiate property under MACRS-

A) GDS ( general Depreciation system)

B) ADS ( alternative deprecation system)

Generally taxpayers use GDS but some situations when the law requires to use ADS.

Under GDS Examples of property classification:-

A) 3- years property:- Tractors, racehorse, qualified rent to own property.

B) 5- years property:- Automobiles,buses,taxis, office machinery, property used in research,computer and peripheral equipment,dairy cattle, breeding cattle etc.

C) 7- years property:- office furniture, railroad trucks, agriculture machinery,natural gas lines etc.

D) 10- years property:- vessels,barges,tree/vines bearing fruits,smart electric grid system etc.

E) 15- years property:- Restaurant property, municipal water treatment plant,retail motor fuel outlets, telephone distribution plant etc.

Depreciation methods allowed under MACRS:-

1) Declining balance method:-

It provides greater deductions in the initial years of the asset's life and less in the later years of use.

2) Straight line method:-

The straight line method deducts the same amount each year except in the first year of service and last year of service,when the asset is disposed of.

Example:- A school buys 60 graphing calculators at a total cost of $4800.we require to prepare MACRS Depreciation schedule.

Ans:- Graphing calculator like computer or office equipment,belong to 5- year class. So the rate of MACRS table for year-5 is below:-

Years. Current Depreciation. Accumulated dep. Book value

0. $4800

1. 4800×.20=960. $960. $3840

2. 4800×.32=1536. $2496. $2304

3. 4800×.1920=922. $ 3418. $1382

4. 4800×.1152=553. $3971. $829

5. 4800×.1152=553. $4524. $276

6. 4800×.0576=276. $4800. $0