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What is depreciation?

IRS Publication 946, How To Depreciate Property (2016), explains it this way:

Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property.

In other words, it is the method by which a business can expense part of the cost of an asset each year over the asset's recovery period.

What is MACRS depreciation?

MACRS or Modified Accelerated Cost Recovery System is, in my opinion, a needlessly complicated system, designed by Congress and implemented by the IRS, for depreciating the cost of assets. MACRS replaced ACRS (Accelerated Cost Recovery System) in 1986.

This MACRS Depreciation Calculator supports nearly all the nuances and conventions of the Internal Revenue Code. It includes support for qualified and listed assets including motor vehicles. While the calculator is capable of depreciating nearly any asset, if you want to use it correctly, you'll need to familiarize yourself with Publication 946 (linked above). More below...»

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With all other calculators on this site, I attempt to provide detail instructions for their use. That is impossible when it comes to using the MACRS Depreciation Calculator. As mentioned, the writers of the IRC (Internal Revenue Code) have made the subject of depreciation needlessly complicated.

Nonetheless, below is some general guidance on the calculator's use. Much of it comes directly from IRS Publication 946.

What Property Can Be Depreciated?

IRS Pub. 946 p.4:

You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, furniture, and equipment. You also can depreciate certain intangible property, such as patents, copyrights, and computer software. To be depreciable, the property must meet all the following requirements.
  • It must be property you own.
  • It must be used in your business or income-producing activity.
  • It must have a determinable useful life.
  • It must be expected to last more than one year.

Options, settings, and inputs explained

Basis - The basis is frequently the cost of the asset. Frequently, but not always. The basis for real estate is always different than the contract purchase price. If you are depreciating property, you must deduct the value of the land. But, you also add to the basis your settlement costs. For example (Pub. 946 p 12):

  • Legal and recording fees.
  • Abstract fees.
  • Survey charges.
  • Owner's title insurance.
  • Amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for

Business Use - If the asset is not used entirely for business, enter the percentage that is for business use. If you enter $100,000 for basis and business use is 80%, then the basis for depreciation (adjusted basis) is $80,000. (The calculator makes this calculation of course.)

Asset Being Depreciated - This has no impact on the calculation. It is included here so that when you print a schedule, it will include the identity of the asset.

Placed Into Service - The date when the asset is available for use. You should note that the business does not have to be using the asset. As long as it is available, the asset is in service.

179 Deduction - The basis is lowered by any 179 deduction that you take.

IRS Pub. 946 p.15:

You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. This is the section 179 deduction. You can elect the section 179 deduction instead of recovering the cost by taking depreciation deductions.

Recovery Period -

IRS Pub. 946 p.34:

The recovery period of property is the number of years over which you recover its cost or other basis. It is determined based on the depreciation system (GDS or ADS) used

The recovery periods available is determined by the depreciation method selected. The calculator automatically limits the choice of recovery periods to the ones that are appropriate for the method selected.

In general, recovery periods are longer under ADS than they are under GDS.

Depreciation Method - Currently, the taxpayer may select from one of four depreciation methods. Three methods fall under GDS and one under ADS. Two GDS methods use a declining balance equation that has the effect of accelerating the tax benefit.

IRS Pub. 946 pp.29 - 30

The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).

Which Depreciation System (GDS or ADS) Applies?

Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS.

IRS Convention - The three conventions establish when the recovery period begins and ends.

IRS Pub. 946 p.36

The mid-month convention: Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of
The mid-quarter convention: Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. This means that 112 months of depreciation is allowed for the quarter the property is placed in service or disposed of
The half-year convention: Under this convention, you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of the year. This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of

Special Allowance - calculated. "Qualified Asset" must be set to "Yes" (see below).

IRS Pub. 946 p.24

You can take a special depreciation allowance to recover part of the cost of qualified property (defined next), placed in service during the tax year. The allowance applies only for the first year you place the property in service. For qualified property placed in service in 2016, you can take an additional 50% special allowance. The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service

Qualified Asset -

Your property is qualified property if it is one of the following:

  • Qualified reuse and recycling property.
  • Qualified second generation biofuel plant property.
  • Certain qualified property placed in service before January 1, 2020.
  • Certain plants bearing fruits and nuts.

Is Asset a Vehicle?:

Type of Vehicle - The vehicle type impacts the amount that a taxpayer can take in depreciation each year.

Listed Asset -

IRS Pub. 946 p.54

Listed property is any of the following:

  • Passenger automobiles (as defined later).
  • Any other property used for transportation, unless it is an excepted vehicle.
  • Property generally used for entertainment, recreation, or amusement (including photographic, phonographic,
  • Computers and related peripheral equipment, unless used only at a regular business establishment and owned or leased by the person operating the establishment. A regular business establishment includes a portion of a dwelling unit that is used both regularly and exclusively for business as discussed in Pub. 587

Indian Reservation Property - Is or isn't the property located on an Indian Reservation? (A legal term. See Pub. 946 p.35.)

IRS Pub. 946 p.2

Accelerated depreciation for qualified Indian reservation property. The accelerated depreciation of property on an Indian reservation will not apply to property placed in service after December 31, 2016, or, if you make an irrevocable election out of all property in a class of property that is placed in service in a tax year beginning after December 31, 2015

Note: The calculator will not create an accurate schedule that incorporates a short tax year.

IRS Pub. 946 p.46

A short tax year is any tax year with less than 12 full months. This section discusses the rules for determining the depreciation deduction for property you place in service or dispose of in a short tax year. It also discusses the rules for determining depreciation when you have a short tax year during the recovery period (other than the year the property is placed in service or disposed of).

Even with the short tax year ommission, I trust that users will find the MACRS Depreciation Calculator helpful. As always, feel free to leave your comments and questions below. Your comments are one of the metrics I use to determine what enhancements or calculators I offer next.

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