---
title: "Short note: MACRS depreciation"
subject: "Engineering Economics"
chapter: 7
key: "semester_6/engineering_economics:short-note-macrs"
source: https://www.bctengineer.com/q/semester_6/engineering_economics/short-note-macrs
site: BCT Engineering
---

# Short note: MACRS depreciation

Engineering Economics · Chapter 7: Depreciation and Corporate Income Taxes

- Asked in: 2069 Poush
- Video: [Modified Accelerated Cost Recovery System Depreciation MACRS - Fundamentals of Engineering Economics](https://www.youtube.com/watch?v=wMtiePEQfuM) — Prepineer
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_6/engineering_economics/short-note-macrs
- Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-7

## Question

Write a short note on MACRS for 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.

## Answer

**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.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. How is a MACRS class assigned?
   A. By asset type, not actual life
   B. By actual life
   C. By salvage value
   D. By the owner's choice of method
   Answer: A. Examples: cars 5-year, most manufacturing equipment 7-year. (Key point: Property class)

2. Why does a 5-year class span 6 tax years?
   A. Table rounding
   B. Half-year convention
   C. Salvage value
   D. Tax law change
   Answer: B. The asset is assumed in service mid-year, so n-year class uses n+1 years. (Key point: Years)

3. How does MACRS treat salvage value?
   A. Deducted from basis
   B. Added to basis
   C. Ignored; the full basis is depreciated
   D. Used to set the rate
   Answer: C. Cost basis is fully depreciated. (Key point: Salvage)

4. What is the 5-year year-1 percentage?
   A. 33.33%
   B. 14.29%
   C. 40%
   D. 20.00%
   Answer: D. Half-year of 40% DB = 20%. (Key point: 5-year percentages)

## Related in Engineering Economics

- [MACRS schedule and after-tax IRR by AW](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Amacrs-after-tax-irr-aw-45000) — Engineering Economics, chapter 7