Tax Depreciation (MACRS) Methods
|Acct 2220 - Federal Tax Depreciation (MACRS) | |
|Handout #5 | |
|Overview (2015 Update): | |
|For Federal tax purposes, the tax depreciation method required for a particular long-term asset is determined at the time you first “place |
|the asset in service”. Whatever rules or tables are in effect for that year must be followed as long as you own the property. Since |
|Congress has changed the depreciation rules many times over the years, you may have to use a number of different depreciation methods if |
|you've owned different kinds of business property over a period of time. |
|For most business property placed in service after 1986, if you don't claim the IRC Section 179 deduction (discussed on the next page) for |
|the full cost of the item, IRS requires you to depreciate the asset using a method called "MACRS," which stands for Modified Accelerated Cost|
|Recovery System. This method categorizes business assets into classes and specifies the time period over which you can depreciate assets in |
|each class. The most commonly used items are classified in the following chart: |
|Class of Property |
|Items Included |
| |
|3-year property |
|Tractor units, racehorses over two years old, and horses over 12 years old when placed in service. |
| |
|5-year property |
|Automobiles, taxis, buses, trucks, computers and peripheral equipment, office machinery (faxes, copiers, calculators etc.), and any property |
|used in research and experimentation. Also includes breeding and dairy cattle. |
| |
|7-year property |
|Office furniture and fixtures, and any property that has not been designated as belonging to another class. |
| |
|10-year property |
|Vessels, barges, tugs, similar water transportation equipment, single-purpose agricultural or horticultural structures, and trees or vines |
|bearing fruit or nuts. |
| |
|15-year property |
|Depreciable improvements to land such as shrubbery, fences, roads, and bridges. |
| |
|20-year property |
|Farm buildings that are not agricultural or horticultural structures. |
| |
|27.5-year property |
|Residential rental property (i.e. Duplexes & Apartments). This also includes furnaces, hot water tanks & roofs (but not stoves, fridges). |
| |
|39-year property |
| |
|Nonresidential real estate, including home offices. |
| |
| |
| |
Note: Land, itself, is not depreciable (for either tax or financial accounting purposes because it has no “determinable life”).
Handout #6: MACRS Depr Schedules
|Tax Year |MACRS Depreciation rate for recovery period |
| |Based upon 200% DDB Method and half-year convention |
| |3-year |5-year |7-year |10-year |15-year |20-year |
|2 |44.45 |32.00 |24.49 |18.00 |9.50 |7.219 |
|3 |14.81 |19.20 |17.49 |14.40 |8.55 |6.677 |
|4 |7.41 |11.52 |12.49 |11.52 |7.70 |6.177 |
|5 | |11.52 |8.93 |9.22 |6.93 |5.713 |
|6 | |5.76 |8.92 |7.37 |6.23 |5.285 |
|7 | | |8.93 |6.55 |5.90 |4.888 |
|8 | | |4.46 |6.55 |5.90 |4.522 |
|9 | | | |6.56 |5.91 |4.462 |
|10 | | | |6.55 |5.90 |4.461 |
|11 | | | |3.28 |5.91 |4.462 |
|12 | | | | |5.90 |4.461 |
|13 | | | | |5.91 |4.462 |
|14 | | | | |5.90 |4.461 |
|15 | | | | |5.91 |4.462 |
|16 | | | | |2.95 |4.461 |
|17 | | | | | |4.462 |
|18 | | | | | |4.461 |
|19 | | | | | |4.462 |
|20 | | | | | |4.461 |
|21 | | | | | |2.231 |
|IRC Sec 179 Note: Writing off (expensing) the Asset in the year acquired. | |
|Normally, you can't take a current Federal tax deduction for the entire cost of an asset in the year of purchase because the asset's usefulness |
|will extend beyond the year in which it was purchased. For tax purposes, an asset must generally be depreciated per the grid above. An exception|
|exists called the IRC “Section 179 Expensing” Election. |
| |
|While many rules and exceptions apply, this Federal tax law provision generally allows business the option of claiming a tax deduction in the |
|first year for the entire cost of qualifying assets purchased. For 2012 - 2014, this amount was up to $500,000. |
|For 2015, this amount is currently only $25,000! (legislative action pending). |
| |
|This incentive, legislated by Congress, is meant to encourage businesses to buy equipment, invest in their own businesses, and thereby create |
|economic activity. The law has changed many times over the years. For comparison, the 2002 limit was only $24,000. This is one example of |
|Congress using tax policy to achieve certain goals. A powerful tool to manipulate social and/or economic conditions! |
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