When you file your taxes as a small business owner, you can deduct depreciation from your gross income through Section 179. As your business assets’ value lessens over time through use, so too can your company’s value, meaning you’d recoup less if you were to liquidate or sell your business. The IRS compensates business owners for depreciation through tax deductions at a rate set through MACRS.
The Modified Accelerated Cost Recovery System (MACRS) is a depreciation calculation adopted in 1986 that is primarily used for tax purposes. Through this system, business owners have a set amount they can deduct, unifying the process across all companies and industries.
Through the MACRS system, an item has higher levels of depreciation during the first few years and lower levels of depreciation as its ages. This process allows business owners to recoup the cost of their assets faster by front-loading tax deductions from depreciation.
How to Calculate MACRS Depreciation
Before you can calculate your MACRS depreciation, you will need to pull information relating to your assets and how the IRS classifies them.
- Start with the original value of the asset—or what you paid for it if you bought it new.
- Determine the item’s class based on its useful life. You can only deduct the item for the number of years during the expected recovery period set out by the IRS. (There will be more on finding your class and the IRS MACRS guidelines later on.)
- Choose your depreciation method. You can use the straight-line depreciation method or declining balance method with different rates depending on your asset and MACRS guidelines.
- Note your MACRS depreciation convention—or the period when you started to use the asset. This can fall into mid-month, mid-quarter, and half-year conventions for IRS calculations.
- Determine what percentage you can deduct using the graphs listed in the IRS MACRS tables.
Pulling this information will take longer as you better understand the limitations of your assets. However, your asset is unlikely to change, meaning once you have the MACRS calculated for 1 year, you can adjust the formula to reflect any changes in future years for accurate depreciation amounts.
To calculate MACRS depreciation, you can use an online calculator to determine how much you can deduct. The right calculator can guide you to make sure your information is accurate by asking specific questions related to your assets.
What Can You Learn From the IRS MACRS Guidelines?
The IRS is specific and detailed when it comes to calculating depreciation for your assets. In its guidelines, the organization explains when you start calculating depreciation and when you end it (it starts when the item is first used and ends when you retire it or recoup the costs fully—whatever happens first).
The IRS also explains what can and cannot be depreciated and how to handle repairs or improvements to the asset. The entire guide is more than 100 pages long, including a glossary of terms and an index of specific topics.
One of the most useful sections of the MACRS guidelines is Table B-1 toward the end, which breaks down the various types of equipment that can be deducted on your taxes, its expected class life, and the recovery period in years.
For example, buses have an expected class life of 9 years and a recovery period for MACRS in 5 years. Meanwhile, sheep and goats for breeding have a class life of 5 years and take 5 years to recover.
Depending on the nature of your business, you can focus on a few key charts set out by the IRS to determine your depreciation amount and guide your MACRS calculations.
Why Should You Use MACRS Depreciation?
Within your industry, you may be legally required to use the MACRS depreciation model to report assets and file for deductions. However, there are added benefits to opting for this calculation.
First, it is easier to prove to the IRS how you reached that deduction amount. You can use their charts and formulas to prove your request is fair and accurate—which will protect you in the event of an audit.
Furthermore, the IRS wants you to recoup the cost of your investment faster. They favor deductions during the first few years so you can get your money back. This can help your company if you invest in expensive equipment that otherwise limits your profits or buying power.
Learn More About Other Depreciation Methods
While the MACRS depreciation method might seem complex, you can better understand your options and tax opportunities if you have a greater understanding of depreciation as a whole. Learn more about depreciation and the additional methods available to you to track it. Some of these methods will be applicable for tax purposes, while others will simply be used to manage your books.
Get to know the resource section offered by Sunrise to become better informed about bookkeeping and asset management