Question

1- In class, we discussed the MACRS system for tax depreciation and special elections available to taxpayers. Explain the MACRS system, the elections available to the taxpayer, and why (why not) a taxpayer would choose to make an election in regards to tax depreciation.   Be sure to include what types of assets qualify for each election.

Answer 1

MACR stands for modified accelerated cost recovery system. MACRS is a depreciation system which allows the capitalized cost basis of an asset to be recovered over a specified life of the asset. Under this system annual deductions can be taken with regards to an asset’s value depreciation. The IRS has published lives of different classes of assets. For instance assets like tractors, racehorses have a useful life of 3 years, assets like automobiles; buses etc. have a useful life of 5 years. Assets are classified as having useful lives of 7 years, 10 years, 15 years, 20 years, 25 years, 27.5 years and 39 years as well.

The elections available to a taxpayer are with regards to selection of declining balance switching to straight line or straight line. Also gain or loss may be deferred or recognized on retirement of assets under MACRS, at the taxpayer's election. A transition rule provides that for a taxpayer’s first taxable year ending after Sept. 27, 2017, the taxpayer may elect to apply a 50 percent allowance instead of the 100 percent allowance. Taxpayers can still elect not to claim bonus depreciation for any class of property placed in service during the tax year. The election out of bonus depreciation is an annual election.

Taxpayers are allowed to claim an additional 50-percent depreciation deduction (bonus depreciation) on qualified property acquired during tax years beginning in 2008. Qualifying property is new MACRS property with a recovery period of 20 years or less, MACRS water utility property, computer software not acquired as an acquisition of all of the assets of a business, and qualified leasehold improvement property. The original use of the property must be by the taxpayer and cannot be purchased from a related party. Property that must be depreciated using the alternative depreciation system (ADS) does not qualify.