Definition
The finance term Modified Accelerated Cost Recovery System, or MACRS, refers to the tax depreciation structure created as a result of the Tax Reform Act of 1986. MACRS is an accelerated approach to the depreciation of an asset, and is based on both the declining balance and straight line methods.
Explanation
The Modified Accelerated Cost Recovery System was first introduced in 1986, and replaced the even more business-friendly ACRS. Under the MACRS, the tax deductions for capital assets, or depreciation expense, occurs at a faster rate than book depreciation of the asset. In doing so, this system provides an incentive for businesses to purchase capital assets.
The exact method of tax depreciation is based on tables published by the IRS. In practice, there are a series of tables that include first-quarter, mid-quarter, third-quarter, and half-year conventions. The exact table to use will depend on the in-service date of the capital equipment.
The time over which depreciation occurs is based on classes of property, as demonstrated in the table below:
Class | Examples |
3-Year Property | Special equipment used in the manufacture of food, beverages, plastics, metal products and motor vehicles. |
5-Year Property | Computer systems, aircraft, drilling equipment, solar, wind and energy property. |
7-Year Property | Office furniture, fixtures, and equipment. |
10-Year Property | Petroleum refining equipment, ships and other transportation vessels. |
15-Year Property | Utility plant such as telephone distribution and municipal sewage treatment facilities. |
20-Year Property | Municipal sewer systems. |
27.5-Year Property | Residential rental property. |
39-Year Property | Non-residential real property. |
Once the asset's property class has been identified, a second table is used which contains the MACRS depreciation schedule as shown below:
Property Class | 3-Year | 5-Year | 7-Year | 10-Year | 15-Year | 20-Year | 39-Year |
1 | 33.333% | 20.000% | 14.290% | 10.000% | 5.000% | 3.750% | 2.564% |
2 | 33.333% | 32.000% | 24.490% | 18.000% | 9.500% | 7.219% | 2.564% |
3 | 33.334% | 19.200% | 17.490% | 14.400% | 8.550% | 6.677% | 2.564% |
4 | 11.520% | 12.490% | 11.520% | 7.700% | 6.177% | 2.564% | |
5 | 11.520% | 8.930% | 9.220% | 6.930% | 5.713% | 2.564% | |
6 | 5.760% | 8.920% | 7.370% | 6.230% | 5.285% | 2.564% | |
7 | 8.930% | 6.550% | 5.900% | 4.888% | 2.564% | ||
8 | 4.460% | 6.550% | 5.900% | 4.522% | 2.564% | ||
9 | 6.560% | 5.910% | 4.462% | 2.564% | |||
10 | 6.550% | 5.900% | 4.461% | 2.564% | |||
11 | 3.280% | 5.910% | 4.462% | 2.564% | |||
12 | 5.900% | 4.461% | 2.564% | ||||
13 | 5.910% | 4.462% | 2.564% | ||||
14 | 5.900% | 4.461% | 2.564% | ||||
15 | 5.910% | 4.462% | 2.564% | ||||
16 | 2.950% | 4.461% | 2.564% | ||||
17 | 4.462% | 2.564% | |||||
18 | 4.461% | 2.564% | |||||
19 | 4.462% | 2.564% | |||||
20 | 4.461% | 2.564% | |||||
21 | 2.231% | 2.564% | |||||
22 | 2.564% | ||||||
23 | 2.564% | ||||||
24 | 2.564% | ||||||
25 | 2.564% | ||||||
26 | 2.564% | ||||||
27 | 2.564% | ||||||
28 | 2.564% | ||||||
29 | 2.564% | ||||||
30 | 2.564% | ||||||
31 | 2.564% | ||||||
32 | 2.564% | ||||||
33 | 2.564% | ||||||
34 | 2.564% | ||||||
35 | 2.564% | ||||||
36 | 2.564% | ||||||
37 | 2.564% | ||||||
38 | 2.564% | ||||||
39 | 2.564% |
Example
Company A purchased a new computer system to automate the tracking of its inventory. The computer system cost $100,000, and based on the MACRS tables, the new asset would be considered 5-year property. As such, the tax depreciation schedule for the new computer system is shown below.
5-Year | Tax Depreciation | Accumulated Depreciation |
20.00% | $100,000 | $100,000 |
32.00% | $160,000 | $260,000 |
19.20% | $96,000 | $356,000 |
11.52% | $57,600 | $413,600 |
11.52% | $57,600 | $471,200 |
5.76% | $28,800 | $500,000 |
Related Terms
The accounting term used to describe an economic resource, which is owned by the corporation and expected to provide future benefits to its operation, is asset. Appearing on the balance sheet, assets are typically broken down into two categories:
Moneyzine EditorJanuary 5th, 2024
The financial accounting term depreciation is sometimes defined as a decline in tangible plant's service potential. Depreciation is a method of allocating the cost of a tangible asset in a systematic manner to those time periods that benefit from the use of the asset.Moneyzine EditorJanuary 16th, 2024
The financial accounting term accumulated depreciation is used to describe a contra asset account that summarizes the total of all the depreciation of an asset that has occurred at a certain point in time.Moneyzine EditorJanuary 4th, 2024
The term declining balance depreciation refers to one of several methods of allocating the cost of an asset over its expected lifetime. The declining balance depreciation method is an accelerated approach to depreciation, and is based on the assumption an asset's value declines at a greater rate in the early years of its serviceable life.Moneyzine EditorJanuary 15th, 2024- The financial accounting term straight line depreciation refers to one of several methods of allocating the cost of an asset over its expected lifetime. The straight line depreciation method is based on the assumption the asset will lose the same value each accounting period.Moneyzine EditorSeptember 21st, 2023
