MACRS, also known as the Modified Accelerated Cost Recovery System, is a widely used tax depreciation method in the United States. It is a system established by the Internal Revenue Service (IRS) to determine the depreciation deduction for tangible assets acquired for business or income-earning purposes.
Under the MACRS method, assets are classified into specific recovery periods based on their respective asset classes as determined by the IRS. Each asset class has an assigned depreciation period, typically ranging from three to 39 years, depending on the type of asset. The purpose of this classification is to spread out the cost of the asset's depreciation over its useful life.
The MACRS system utilizes an accelerated depreciation method, which means that a larger portion of the asset's cost is deducted during its early years of service, and the deduction gradually decreases over time. This is in contrast to the straight-line depreciation method, where the deduction remains consistent throughout the asset's useful life.
To determine the depreciation amount, the MACRS system employs specified depreciation percentages, called recovery periods or rates, which vary according to the assigned depreciation schedule for the asset class. These percentages are multiplied by the asset's cost to calculate the depreciation deduction for each year.
Overall, the MACRS system provides a tax benefit to businesses by allowing them to recover their investment in assets over time through annual depreciation deductions, thereby reducing their taxable income and lowering their tax liability.
