Question

how to calculate MACRS Depreciation. Please describe Clearly with example calculation, i can't understand by old answers.

Answer 1

SOLUTION

Meaning of MACRS Depreciation

MACRS depreciation is the tax depreciation system used in the United States. MACRS is an acronym for Modified Accelerated Cost Recovery System. Under MACRS, fixed assets are assigned to a specific asset class, which has a designated depreciation period associated with it.

There are two main depreciation systems that taxpayers may use to depreciate property under MACRS depreciation – the Alternative Depreciation System (ADS) and the General Depreciation System (GDS). The system selected will determine the recovery period and depreciation method to use. Generally, taxpayers are expected to use GDS, but there are situations when the law requires them to use ADS or when taxpayers may elect to use the ADS system.

MACRS formula depreciation uses either a declining balance formula or a straight-line formula.

• MACRS Straight-Line Formula Depreciation
• MACRS Declining Balance Depreciation

MACRS Straight-Line Formula Depreciation

In the MACRS straight-line method, LN calculates a new applicable percentage of depreciation in each year of the asset's life. The MACRS SL formula uses the asset's remaining life rather than its original depreciation life in the calculation.

In MACRS straight line, LN calculates the percentage for a year by dividing one depreciation period by the remaining life of the asset, and then applying this amount with the averaging convention to determine the depreciation amount for that year.

In the first year, LN divides the resulting annual depreciation amount evenly across each period from the beginning of the recovery period to the end of the year. In subsequent years, LN divides the depreciation amount evenly across each period in the year.

Note

If the asset for which you are calculating depreciation contains an averaging convention, LN adjusts the depreciation expense for the first half-yearly, quarterly, or monthly calculation. For more information, refer to Calculations and Averaging Conventions.

MACRS straight line formula:

depreciation = (cost - accumulated depreciation) * (1 / remaining life) 

Example

Your company has an asset with a cost of $10,000, an estimated life of seven years, and a half year averaging convention. Because of the averaging convention, LN must calculate the full annual depreciation for the first year but record only half of the resulting depreciation. The annual depreciation for the first year of the asset's life is calculated as:

 [ $10,000 * (1 / 7) ] ___________________ = $714.29 2 

LN divides this amount evenly from the in-service date to the end of the first fiscal year.

In the second year of the asset's life, the remaining life is now 6.5 years. LN calculates the annual depreciation as follows:

 [ ($10,000 - $714.29) * (1 / 6.5) ] = $1428.57

LN divides this amount evenly across the twelve periods in the calendar year which results in a depreciation amount of $119.05 in each period of the second year.

In the third year of the asset's life, the remaining life is now 5.5 years. LN calculates the annual depreciation as follows:

 [ ($10,000 - $2142.86) * (1 / 5.5) ] = $1428.57

LN divides this amount evenly across the twelve periods in the calendar year which results in a depreciation amount of $119.05 in each period of the third year.

Note

If the asset for which you are calculating depreciation contains an averaging convention, LN adjusts the depreciation expense for the first half-yearly, quarterly, or monthly calculation. For more information, refer to Calculations and Averaging Conventions.

MACRS Declining Balance Depreciation

The formula used by MACRS declining balance is the same as the formula used in the regular declining balance formula with a switch to straight line. LN uses declining balance for the first portion of the asset's life, then switches to straight line with remaining life.