What is MACRS Depreciation?

Definition: MACRS depreciation or Modified Accelerated Cost Recovery System depreciation is an accounting procedure designed for tax purposes that depreciates a given asset in an accelerated manner. This is a technique established by the U.S. Government that allows businesses to depreciate assets rapidly during its first years.

What Does MACRS Depreciation Mean?

The Modified Accelerated Cost Recovery System, also known as MACRS, was approved by the U.S. Congress through the Tax Reform Act of 1986 and it took the place of the previously established Accelerated Cost Recovery System (ACRS). This system allows the business or asset owner to deduce a big portion of the asset’s value during the first years of its useful life. To calculate depreciation properly through MACRS there are three important steps to take: first, to figure out the class of the property, according to the classification established by the Internal Revenue Service (IRS).

After that, the depreciation convention must be identified, depending on the treatment that should be given to the asset, according to the IRS. Finally, the depreciation method employed must be selected. There are three methods available for the MACRS, which are: 150% declining balance, 200% declining balance and the straight-line method. The Internal Revenue Service provides a full explanation on how depreciation charges should be calculated on its official website, which is a particularly useful tool for accountants and business owners.

Example

Sustainable Energy Co. is a company that provides energy generated by wind to many states within the U.S. The company is currently acquiring 12 wind turbines at a cost of $30 million. The company acquired these equipments on February 1st and they are figuring out how they should depreciate these newly incorporated assets.

According to our description, the first step is to figure the property class. Wind turbines, according to the IRS, are non-form 5-year property.

Secondly, the selected depreciation convention was half-year convention.

Finally, the company decided to employ the 200% declining balance method.

The result, according to the tables supplied by the IRS, was a first year depreciation charge of 6 million, second year should be $9.6 million, and so on. Sustainable Energy will get most of the asset value back in the first 3 years of depreciation, according to the selected method, under the MACRS.