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L23: Tax Depreciation. ECON 320 Engineering Economics Mahmut Ali GOKCE Industrial Systems Engineering Computer Sciences. Tax Depreciation. Purpose : Used to compute income taxes for the IRS Assets placed in service prior to 1981 Use book depreciation methods (SL, DB, SOYD)

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L23 tax depreciation

L23: Tax Depreciation

ECON 320 Engineering Economics

Mahmut Ali GOKCE

Industrial Systems Engineering

Computer Sciences


Tax depreciation
Tax Depreciation

  • Purpose: Used to compute income taxes for the IRS

  • Assets placed in service prior to 1981

  • Use book depreciation methods (SL, DB, SOYD)

  • Assets placed in service from 1981 to 1986

  • Use ACRS (Accelerated Cost Recovery System) Table

  • Assets placed in service after 1986

  • Use MACRS (Modified ACRS) Table


Modified accelerated cost recovery systems macrs
Modified Accelerated Cost Recovery Systems (MACRS)

Under MACRS, Several Classes of Assets, each with lifespans called recovery period

Recovery periods do not necessarily correspond to useful lives.

  • Personal Property

    • Depreciation method based on DB method switching to SL

    • Half-year convention (put in service in mid-year. Half year depr. 1st year. Half year depreciation year following the recovery period)

    • Zero salvage value

  • Real Property

    • SL Method

    • Mid-month convention

    • Zero salvage value


MACRS Property Classifications (IRS Publication 534) ADR=Asset Depreciation Range

ADR: Asset Depreciation Range


Macrs table

Recovery Allowance Percentages=prescribed depreciation rates ADR=Asset Depreciation Range

MACRS Table


Macrs rate calculation
MACRS Rate Calculation ADR=Asset Depreciation Range

Asset cost = $10,000

Property class = 5-year recovery period

DB method = Half-year convention, zero salvage value,

200% DB switching to SL

11.52%

$1152

Full

20%

$2000

32%

$3200

Full

19.20%

$1920

Full

11.52%

$1152

Full

5.76%

$576

1 2 3 4 5 6

Half-year Convention


Year ( ADR=Asset Depreciation Rangen)

1

2

3

4

5

6

Calculation in %

(0.5)(0.40)(100%)20%

(0.4)(100%-20%)32%

SL = (1/4.5)(80%) 17.78%

(0.4)(100%-52%)19.20%

SL = (1/3.5)(48%) 13.71%

(0.4)(100%-71.20%) Switch to SL 11.52%

SL = (1/2.5)(29.80%)11.52%

SL = (1/1.5)(17.28%)11.52%

SL = (0.5)(11.52%)5.76%

MACRS (%)

DDB

DDB

DDB

SL

SL


Conventional db switching to sl
Conventional DB Switching to SL ADR=Asset Depreciation Range

4,000 2,400 1,440 1,080 1,080

MACRS with half-year convention

2,000 3,200 1,920 1,152 1,152 576

CHECK OUT COURSE WEB PAGE FOR MACRS ANALYSIS TOOL


Macrs for real property
MACRS for Real Property ADR=Asset Depreciation Range

Types of Real Property

  • 27.5-year (Residential)

  • 39-year (Commercial)

  • SL Method

  • Zero salvage value

  • Mid-month convention

  • Example: Placed a residential property in service in March.

    • 9.5 months of depreciation for first year allowed

  • Find the depreciation allowance in year 1.

  • D1 = (9.5/12)(100%/27.5)

    • = 2.879%


  • Depreciation allowances for a 10 year ownership of the property
    Depreciation Allowances for a 10-year Ownership of the Property

    Assume that the property will be sold in December of the10th year.


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