Reporting Depreciation for Tax Purposes (MACRS) - Explained
What is the Modified Accelerated Cost Recovery System?
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Table of ContentsHow to Report Depreciation for Taxes? What is the Modified Accelerated Cost Recovery System (MACRS)?How Does the Modified Accelerated Cost Recovery System Work?Examples of MACRS and Useful Life of Assets
How to Report Depreciation for Taxes?
It is common for companies to use one method of reporting for financial reporting and a different method of depreciation for tax reporting purposes.
For financial reporting purposes, I have to keep up with my useful life and my salvage value. I cannot depreciate further than my depreciable base. When it comes to taxes. I'm able to depreciate the entire value. I don't have to worry about the salvage value.
What is the Modified Accelerated Cost Recovery System (MACRS)?
The modified accelerated cost recovery system (MACRS) is an accelerated depreciation system used in the United States. MACRS offers a cost recovery system through which the capitalized or basis costs of tangible assets can be recovered over a specified life of the asset. This cost recovery is actualized through annual deductions or tax depreciation of the asset. The specified life of an asset during which annual deductions can be made for value depreciation is contained in the Internal Revenue Code (IRC). The IRC also gives the specific assets that can enjoy accelerated depreciation under this system.
How Does the Modified Accelerated Cost Recovery System Work?
MACRS was introduced in the United States in 1981 but was named the Accelerated Cost Recovery System (ACRS). The Congress formally passes MACRS in 1987 after the passage of the Tax Reform Act of 1986. When ACRS was introduced, it allowed accelerated depreciation with the aim of encouraging companies and businesses to invest in depreciable assets. Companies need MACRS for tax reporting, and under this system, tangible assets can enjoy higher accelerated depreciation for an extended period. The Internal Revenue Service (IRS) considers depreciation as a form of tax deduction that allows companies to recover the capitalized cost basis of assets. Despite that MACRS is widely recognized by regulatory bodies in the United States, it is not approved for external reporting by the generally accepted accounting principles (GAAP). Here are some points to know about the modified accelerated cost recovery system (MACRS);
- MARCS is a tax system that offers accelerated depreciation for tangible assets, through this depreciation, a business can recover the cost basis of long-term assets over a specified time od the assets useful life.
- The cost basis of assets is recovered over a through annual deductions for value depreciation of the asset.
- The specific types of assets that MACRS cover and the specified life during which annual deductions are made are specified in the Internal Revenue Code.
- MACRS offers higher and faster depreciation in the early useful years of an asset.
Examples of MACRS and Useful Life of Assets
Examples of assets that MACRS can be applied to include heavy equipment, machinery, computers, automobiles, office furniture, tractors, warehouses, buildings among others. Eligibility of assets for MARCS and what their expected useful life should be are stipulated by the IRS. There are various types of assets and each category has a useful life different from other categories. The IRS published some classes of assets and their useful life, examples are;
- Automobiles, vehicles, computers, office machinery, furniture, and others = 5 years
- Office furniture, fixtures, agricultural machinery, railroad track, and others = 7 years
- Agricultural structure, Vessels, fruit-bearing tree or vine and others = 10 years
- Municipal sewers, Farm buildings = 20 years.
What are Plant Assets? – Financial Accounting
- Depreciation, Depletion, and Amortization
- How Reporting Depreciation for Tax is Unique? – Financial Accounting
- What happens when Depreciation Estimates Change? – Financial Accounting
- What are Capital Expenditures? – Financial Accounting
- How to Dispose of Plant Assets? – Financial Accounting