Question

A company that utilizes the MACRS system of depreciation but does not use bonus depreciation:

Multiple Choice

• will have a greater depreciation tax shield in Year 2 than in Year 1.

• can depreciate the cost of land.

• will have equal depreciation costs each year of an asset's life.

• will fully depreciate a MACRS five-year asset within 5 years.

• will expense less than the entire cost of an asset.

Answer 1

Statement 1: Correct. This is becasue the depreciation in year 2 will be a positive number under MACRS whereas for bonus depreciation the entire asset will be expensed in Year 1. This will create a tax shield in year 2 for MACRS.

Statement 2: Incorrect Land is not a depreciable asset

Statement 3: Incorrect MACRS depreciation differs for every year

Statement 4: Incorrect Full depreciation for a 5 year asset class will be done at the end of 6 years

Statement 5: Incorrect MACRS expenses the entire cost of the asset