General Depreciation System (GDS): This is the most widely used system and provides a larger depreciation deduction in the earlier years of an asset’s life.
Alternative Depreciation System (ADS): This system is used for certain types of property that require a longer recovery period. It generally results in slower depreciation compared to GDS.
Which Assets Qualify for MACRS?
Most tangible personal property and certain buildings and structures qualify for MACRS. Examples include
machinery,
vehicles, computers, and office furniture. However, certain assets like land, intangible assets, and property placed in service and disposed of in the same year are excluded.
Tax Benefits: Accelerated depreciation reduces taxable income, which can lower a company’s tax liability in the early years of an asset's life.
Cash Flow: Lower tax payments mean more cash is available for
reinvestment and other business activities.
Investment Incentives: Encourages businesses to invest in new assets by offering quicker cost recovery.
Determine the asset’s
depreciable basis, which is usually the asset’s cost plus any additional costs required to place it in service.
Identify the applicable recovery period from the IRS tables.
Select the appropriate convention (Half-Year or Mid-Quarter).
Apply the depreciation rate from the MACRS tables for the asset’s category and recovery period.
Complexity: The system can be complex to navigate, requiring detailed record-keeping and familiarity with IRS tables and rules.
Non-Applicability: Certain types of property are not eligible for MACRS, requiring alternative methods of depreciation.
Short-Term Focus: Accelerated depreciation benefits are front-loaded, which might not always align with a company’s long-term financial planning.