1. L23: Tax Depreciation ECON 320 Engineering Economics Mahmut Ali GOKCE
Industrial Systems Engineering
Computer Sciences

2. 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

3. 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

4. MACRS Property Classifications (IRS Publication 534) ADR=Asset Depreciation Range
Recovery Period
ADR Midpoint Class
Applicable Property
3-year
Special tools for manufacture of plastic products, fabricated metal products, and motor vehicles.
5-year
Automobiles, light trucks, high-tech equipment, equipment used for R&D, computerized telephone switching systems
7-year
Manufacturing equipment, office furniture, fixtures
10-year
Vessels, barges, tugs, railroad cars
15-year
Waste-water plants, telephone- distribution plants, or similar utility property.
20-year
Municipal sewers, electrical power plant.
27.5-year
Residential rental property
39-year
Nonresidential real property including elevators and escalators
ADR: Asset Depreciation Range

5. MACRS Table
Recovery Allowance Percentages=prescribed depreciation rates

6. MACRS Rate Calculation
Asset cost = $10,000
Property class = 5-year recovery period
DB method = Half-year convention, zero salvage value,
200% DB switching to SL
20%
$2000
32%
$3200
Full
19.20%
$1920
Full
11.52%
$1152
Full
11.52%
$1152
Full
5.76%
$576
Half-year Convention

7. Year (n) 1 2 3 4 5 6
Calculation in %
(0.5)(0.40)(100%) 20%
(0.4)(100%-20%) 32%
SL = (1/4.5)(80%) %
(0.4)(100%-52%) %
SL = (1/3.5)(48%) %
(0.4)(100%-71.20%) Switch to SL 11.52%
SL = (1/2.5)(29.80%) %
SL = (1/1.5)(17.28%) %
SL = (0.5)(11.52%) %
MACRS (%)
DDB
DDB
DDB SL SL

8. Conventional DB Switching to SL
4,000 2,400 1,440 1,080 1,080
MACRS with half-year convention
2,000 3,200 1,920 1,152 1,
CHECK OUT COURSE WEB PAGE FOR MACRS ANALYSIS TOOL

9. MACRS for Real Property
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%

10. Depreciation Allowances for a 10-year Ownership of the Property
Year (n)
Calculation
Allowed Depreciation (%) 1
(9.5/12)(100%/27.5)
2.8788% 2
100%/27.5
3.6364% 3 4 5 6 7 8 9 10
(11.5/12)(100%/27.5)
3.4848%
Assume that the property will be sold in December of the10th year.