Depreciation (MACRS) Flashcards
(25 cards)
How is the adjusted basis of an asset calculated for tax purposes?
Adjusted basis = Initial cost (basis) – Accumulated depreciation (cost recovery taken).
What is the difference between ACRS and MACRS?
ACRS applies to assets placed in service after 1980; MACRS applies to assets placed in service after 1986 and is the primary system used today.
What types of assets are eligible for MACRS depreciation?
Tangible property subject to wear and tear or obsolescence with a determinable useful life, including tangible personal and real property.
Name assets ineligible for MACRS.
Intangible property (e.g., patents, copyrights), films, videotapes, and sound recordings.
What is the formula for straight-line depreciation?
Annual Depreciation = (Cost – Salvage Value) / Useful Life.
Give an example of straight-line depreciation for a $100,000 machine, $20,000 salvage value, 5-year life.
($100,000 – $20,000) / 5 = $16,000 per year.
What is the main advantage of MACRS?
Allows accelerated depreciation for higher deductions in early years, resulting in greater tax savings and improved cash flow.
What are the two MACRS systems?
General Depreciation System (GDS) and Alternative Depreciation System (ADS).
Which depreciation methods are used under MACRS?
200% declining balance (most common for personal property), 150% declining balance, and straight-line.
What is Section 1245 property?
Generally personal property.
What is Section 1250 property?
Real property.
How do you calculate MACRS depreciation for a $1,500 asset, 5-year property, using 200% declining balance?
Year 1: $1,500 × 20% = $300 deduction
Year 2: ($1,500 – $300) × 20% = $240 deduction
Continue until fully depreciated.
What are MACRS conventions?
Rules (half-year, mid-quarter, mid-month) to determine depreciation allowed in the first and last years, based on when the asset is placed in service.
Can you switch from ADS back to GDS for an asset?
No, once ADS is elected, you cannot revert to GDS for that asset.
What is the tax impact of accelerated depreciation under MACRS?
Greater tax savings and improved cash flow in the early years.
What is the difference between GDS and ADS?
General Depreciation System (GDS): Default, uses accelerated methods (200% or 150% declining balance, or straight-line). The recovery periods are shorter and is the default MACRS system.
Alternative Depreciation System (ADS): Uses straight-line over longer periods; required for certain property or elections. The recovery periods are longer.
Certain special tools and racehorses use what MACRS schedule?
3-year
Computers, autos, trucks (1245) us what MACRS schedules?
5-year
Office furniture, fixtures (1245) use what MACRS schedule?
7-year
Certain equipment, vessels use which MACRS schedule?
10-year
Land improvements, qualified leasehold improvements use which MACRS schedule?
15-year
Utilities, farm buildings use which MACRS schedule?
20-year
Water utility property use which MACRS schedule?
25-year
Residential rental property (1250) uses which MACRS schedule?
27.5 year
