Question

How would you compare the MACRS method for personal property to non-tax financial depreciation? Describe the MACRS system for personal property in terms of both (1) Recovery Period and (2) Depreciation method used. Why is MACRS less "realistic"? Also, why does the tax law allow taxpayers to use this special method?

Answer 1

Solution:-

A non-tax financial deprecation considerer’s asset to be depreciated over the expected useful life. It has a better representation of the actual value an asset over time. However, firms can writeoff their depreciation in different ways. One of them is a Modified Accelerated Cost Recovery System (MACRS) is the method of depreciation allowed in the United States federal tax deduction system. MACRS is more favorable due to a rapid depreciation expense it gives and reduces the net present value of the tax owed (Staff, 2018).

Some of the stringent rules should be followed when applying MACRS depending on the asset classification which is not related to asset usage or useful life. Historically in the U.S., the depreciation expense deduction was always permitted and there were no specific rules in terms of method of depreciation to use of the assumptions of the useful life of the asset. Hence to standardize the method of depreciation a deduction IRS introduced a method where the rates of the depreciation allowable are being specifically mentioned and now only two methods of depreciation accounting are allowed, depreciation on diminishing balance or straight-line method. In terms of MACRs, once the recovery life is known using it is straightforward. Thus, the recovery period is the statutory life or the period over which the taxpayer will allocate the depreciation expense. The method is usually double declining (200%) method used when the asset classified under 10-year recovery life. Moreover, 150% DB method for asset recovery life is between 10-20 years and straight-line method when the asset is 25 or above cost recovery life (MACRS GENERAL RULES, 2015).

We should not necessarily term MACRS as less realistic as the intention behind introducing was to eliminate existing practice of different assumptions in relation to asset lives and residual values at the end of useful life. The assets were grouped into different useful lives and the rates were prescribed to factor the effective depreciation rate on diminishing balance methods. I believe that the reason for allowing taxpayers to special allowances and deductions within MACRS was to promote capital investments by allowing different deprecations for different assets. As IRS would provide more depreciation deductions, it will benefit on some asset class to promote economic growth through capital investment in those assets.

Taxpayers allowed to take depreciation which reduces adjusted asset bases while saving money for the taxpayer as a form of tax deduction. The government wants to recover or reverse that deduction when the asset sold for more than the adjusted basesMACRS depending on the asset classification which is not related to asset usage or useful life. Historically in the U.S., the depreciation expense deduction was always permitted and there wereno specific rules in terms of method of depreciation to use of the assumptions of the useful life ofthe asset.