In: Accounting
The Internal Revenue Code (IRS) uses the Modified Cost Recovery System (MACRS) to compute depreciation for tax purposes. Depreciation under MACRS is similar to that computed under the double-declining-balance method.
Initial Post
As defined by the Internal Revenue Service (IRS), depreciation is an income tax deduction that allows a business to recover the cost basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property. Most tangible assets are depreciable. Likewise, certain intangible assets, such as patents and copyrights, are depreciable.
The modified accelerated cost recovery system (MACRS) is the proper depreciation method for most assets. MACRS allows for greater accelerated depreciation over longer time periods. This is beneficial since faster acceleration allows individuals and businesses to deduct greater amounts during the first few years of an asset's life, and relatively less later. Depreciation using MACRS can be applied to assets such as computer equipment, office furniture, automobiles, fences, farm buildings, racehorses, and so on
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 method or other methods of accelerated cost depreciation.