Modified Accelerated Cost Recovery System (MACRS)
Candlefocus EditorUnder MACRS, businesses have the choice of two systems — the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS is the most commonly used system, and offers faster depreciation of assets in the early years of the asset’s life, followed by a slowing of depreciation as the asset’s value decreases. For example, if a company purchases a computer, they may use MACRS to spread out the cost of the computer over a number of years, such as four or five years. The business can then defer the cost and receive tax deductions each year the asset is used.
ADS, on the other hand, allows businesses to deduct a constant percentage of the original cost of the asset over the useful life of the asset. This depreciation is generally not as favorable for tax purposes as the General Depreciation System. The decision to use GDS or ADS depends on the taxpayer’s tax preferences and the terms of the agreement between the taxpayer and the IRS.
The IRS provides guidance and a list of assets that are eligible for MACRS, as well as details on the useful life of the asset, which must be taken into account when calculating depreciation. The specific asset must be assessed on a case-by-case basis in order to determine eligibility under the MACRS provisions.
MACRS is beneficial for businesses since it enables them to recover the cost basis of certain assets more quickly and take advantage of tax savings. By spreading the cost of the asset over its specified useful life, businesses can budget accordingly and accurately track the asset’s performance. The savings achieved with MACRS allow companies to use the money more effectively and focus on other business activities.