Recently, we looked at depreciation as a method that businesses use to expense long-term assets like vehicles for their records. For income tax though, depreciation is a bit more federally standardized and potentially more complex. The Modified Accelerated Cost Recovery System, or MACRS for short, is the current depreciation system in use for federal income tax purposes. Depreciation for federal income taxes as a deduction are filed through Form 4562.
MACRS Class
Under MACRS, tangible business property that are normally depreciated such as vehicles and buildings are placed into broad classes with pre-set depreciable useful lives that may vary on the class of the property. For example, “office furniture” is set at 7 years, while “automobiles” are set at 5 years, and “nonresidential properties” like warehouses are set at 39 years. Most assets have to depreciate using MACRS, with some exceptions such as film and sound recordings. The IRS publishes depreciation tables applicable to these classes of assets and how much is depreciated each year in the asset’s useful life.
Depreciation methods in MACRS
MACRS allows for only 3 methods for calculating depreciation; the straight-line method, declining balance method, and the double-declining balance method. Businesses may prefer to use methods like “Units-of-Production” to better measure their depreciation of assets for their books, but they must use the MACRS-approved depreciation methods for income tax.
Bonus Depreciation
On occasion, provisions in federal law allow for “bonus depreciation” that enable an additional deduction. This may allow businesses to fully expense their assets faster than through the regular MACRS system. They usually apply to property acquired & put into service in a certain time frame. For example, the Tax Cuts & Jobs Act of 2017 allow for 100% bonus depreciation on qualified property put in service between 9/27/17 through 12/31/22.
Business owners should be aware of the different requirements in MACRS depreciation and depreciation methods your business chooses for their records. It typically leads to discrepancies in depreciation expenses for books and for income tax. Minding such things on top of growing the business can be a burden. Burdens can be shared, and we at MiklosCPA are happy to help shoulder it! We are a California-based firm that helps many small and emerging businesses with their tax and accounting needs. Want to learn more of our services? Let’s chat. Also check out our social media pages for more tax tips, overviews, and other “good to know” pieces.