Question

10 3. A 5-year property class was depreciation schedule. purchased for $125,000.00. Compute the MACRS 5

Answer 1

ANSWER

The Modified Accelerated Cost Recovery System, or MACRS, is the predominant depreciation tool to evaluate depreciation deductions for federal income tax purposes permitted in the U.S. The depreciation method in MACRS allows for greater depreciation deductions in the early years and lesser deductions in the latter years of owning.

Under MACRS, the depreciation deduction is calculated using one of the following methods:

• The declining balance method with switch to straight line method,
• The straight line method only.

MACRS is made up of two systems: the general depreciation system (GDS), and, the alternative depreciation system (ADS).

On the basis of recovery periods of 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, 25-year property, 27.5-year residential rental property, and 39-year nonresidential real property; assets are grouped into property classes.

MACRS Depreciation Formula

D_i = C x R_i

Where,

D_i is the depreciation in year i,

C is the original purchase price, or basis of an asset

R_i is the depreciation rate for year i, depends on the asset's cost recovery period

Considering the information provided in the question, the following solution is being provided:

Basis: $125,000

Date Placed in Service: January, 2019 (This has been assumed for the purpose of solution

Recovery Period: 5 years

Depreciation method: Straight Line Method (Again this has been assumed for the purpose providing a solution, other methods with percentage declining balance can also be used.

IRS Convention: Half-Year Convention (Assume for the purpose of solution)

MACRS 5-Year Depreciation Schedule

Year	Adjusted Basis	Rate %	Depreciation	Cumulative	Book Value	Method
2019	125,000	10	12,500	12,500	112,500	SL
2020	112,500	20	25,000	37,500	87,500	SL
2021	87,500	20	25,000	62,500	62,500	SL
2022	62,500	20	25,000	87,500	37,500	SL
2023	37,500	20	25,000	112,500	12,500	SL
2024	12,500	10	12,500	125,000	0	SL

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