When it comes to accounting for business assets, depreciation is an important concept. Depreciation allows you to take into account the decrease in value of an asset over time, and deduct a portion of that value from your taxable income each year. One method of depreciation commonly used by businesses is the Modified Accelerated Cost Recovery System (MACRS).
MACRS depreciation takes into account the useful life of an asset and divides its cost over a set number of years, using a specific formula. The IRS has established tables that assign different recovery periods based on the type of asset being depreciated.
For example, let’s say you purchase a delivery truck for $30,000. According to the MACRS table provided by the IRS, this type of vehicle has a useful life of five years. To calculate your annual depreciation expense under MACRS, you would divide the cost by five ($30,000 ÷ 5 = $6,000), which gives you an annual deduction amount.
However, MACRS also requires that businesses use one of two methods for calculating depreciation: straight-line or accelerated. Straight-line means that you will deduct equal amounts each year over the course of the asset’s useful life. Accelerated means that more will be deducted in earlier years than later ones.
The advantage to using accelerated depreciation is that it provides larger deductions in earlier years when cash flow may be tighter due to higher expenses related to acquiring new assets or starting up operations; however it reduces deductions and increases taxable income in later years.
Another consideration when it comes to MACRS is “bonus” depreciation which was temporarily increased as part COVID-19 relief legislation enacted in 2020 allowing businesses can immediately write off 100% costs associated with buying qualified property until 2022 instead having to spread out those deductions over several tax cycles.
It’s important for business owners who plan on purchasing new equipment or other fixed assets during this period take note so they make sure to maximize their deductions before the provision expires.
In conclusion, MACRS depreciation is a valuable tool for businesses that need to account for and deduct the decrease in value of assets over time. By understanding the MACRS tables and formulas, as well as choosing between straight-line and accelerated depreciation methods, business owners can reduce their taxable income while investing in new equipment or other fixed assets they need to grow their companies.