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Short note: MACRS depreciation
Short answer
MACRS is the U.S. tax depreciation method using fixed percentage tables based on property class, with 200% declining balance and half-year convention; salvage is ignored. It gives larger early deductions, raising after-tax PW.
Write a short note on MACRS for depreciation.
MACRS (Modified Accelerated Cost Recovery System) is the depreciation method prescribed for tax purposes in the United States since 1986. It is the standard accelerated method used in engineering economics textbooks.
Main features
- Assets are placed in a property class (3, 5, 7, 10, 15 or 20 years) according to their type, not their actual life. For example, computers and cars are 5-year property, and most manufacturing equipment is 7-year property.
- A fixed percentage table is used. It is based on 200% declining balance (150% for some classes), switching to straight line when that gives a larger deduction, with the half-year convention (the asset is assumed to be placed in service in mid-year). Hence an n-year class is depreciated over n + 1 tax years.
- Salvage value is ignored; the full cost basis is depreciated.
- If the asset is sold, the difference between the selling price and the book value is a taxable gain (depreciation recapture) or a deductible loss.
Percentages (% of cost basis)
| Year | 3-year | 5-year | 7-year |
|---|---|---|---|
| 1 | 33.33 | 20.00 | 14.29 |
| 2 | 44.45 | 32.00 | 24.49 |
| 3 | 14.81 | 19.20 | 17.49 |
| 4 | 7.41 | 11.52 | 12.49 |
| 5 | 11.52 | 8.93 | |
| 6 | 5.76 | 8.92 | |
| 7 | 8.93 | ||
| 8 | 4.46 |
Example
Cost basis Rs 1,00,000, 5-year class: depreciation = 20,000; 32,000; 19,200; 11,520; 11,520; 5,760.
Advantage
Larger deductions in the early years reduce taxes early and raise the present worth of the after-tax cash flows, so it is preferred to straight line for tax purposes.
✓ Answer checked by Claude Opus 5.5 (high effort)
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