# ads depreciation tables

Published on: January 1 2023 by pipiads

Table of Contents About ads depreciation tables

## How to Use MACRS Tables

let's tok a little bit now about those,tables and how you actually use them to,depreciate in the modified accelerated,cost recovery system now you've already,seen that the IRS puts you in a couple,of different categories and these are,the non real estate categories and you,notike that there are some assets that,last three years some last five some,last seven and so on down the line and,each one of these is a declining balance,method ology of some of some kind either,double declining or time-and-a-half,balance and there's a couple of features,that are built into this you know the,way you use the tables is you simply,take the cost basis of the asset that's,how much you paid for it and multiply it,by the certain percentage that's right,here and that's how much depreciation,which percentage of the cost basis you,take as depreciation each year so for,example focusing in on this five-year,asset say you buy yourself to me like a,ten thousand dollar car cars a five-year,asset the first year that you own the,asset you will take 20% of the cost,basis of the car as depreciation so it's,a ten thousand dollar car you take,twenty percent of it two thousand,dollars as depreciation the second year,you own the car you take thirty two,percent of the cost basis as,depreciation so in the case of this ten,thousand dollar car you're taking thirty,two hundred dollars and so on down the,line so it's it's really easy you don't,have to go through that complicated,process that you saw with the double,declining balance of finding out what,your book value was multiplying that by,one on the life the acid and so on down,the line it's all been done for you,now the reason why that you're able to,do that is because of that assumption in,that modified accelerated cost recovery,system that the salvage value is zero,you can see that it's built in because,if you add up all these values you're,going to find out that you fully,depreciate you bring the value of the,asset all the way down to zero over the,life and that's how that salvage value,of zero is embedded in the tables now,the other thing is kind of strange is,that there's all that stuff about,half-year conventions and this is,actually the table for a half year,convention of these assets well what,happens is is that the half years are in,here so that first year you own the,asset,you get less depreciation than the,second year you own the asset and that's,because that first year is assumed to be,just a half-year and you also have this,final year over here which is also a,half a year so if you're looking at a,five-year asset you see it actually,depreciates over six years because yeah,half a year here full year full year,full year full year and then there's the,other half a year so the asset lasts,five years but it's aliased out over six,years and that's true for all these down,here the three year asset depreciates,over for the seven-year asset,depreciates overhead and so on down the,line now what's also done the tables for,you so that you don't have to do it is,that nasty transition that the declining,Bennett up balance methods have to go,through to straight-line depreciation or,to get you down to your salvage value so,you notike for five-year two ppreciate,it hits a certain level and then,suddenly it's the same it's the same and,this is this by point seven six percent,is actually half eleven point five two,so it transitions to straight-line,depreciation at the right time same,thing over here here's a transition of,straight-line depreciation and here's a,transition to straight-line depreciation,this is just bouncing back and forth in,order to make it so it actually adds up,to one and here you see a transition of,straight-line depreciation - so it's all,taken care of finding out what,appreciation is at any given year is so,simple with the modified a celebrated,cost recovery system I simply find out,what asset class you're dealing with,find out what year of depreciation,you're in and you multiply that number,the table by the con

## How to Implement MACRS Depreciation Method + Example

hello and welcome back everyone let's,continue our discussion on,macrs depreciation method the assumption,for macrs method,is that salvage value is going to always,be zero,and again that's a great news for,taxpayer because,it may be counterintuitive at the,beginning you don't want to have a,salvage value of zero,but for tax purposes you do want to have,this average value of zero,because that allows you to,receive tax credit for the entire amount,of your investment,you're essentially telling irs that my,asset,is going to depreciate fully to zero,so that's the first assumption and then,most assets are assigned to,eight property classes and those eight,property classes are very important,they have pre-established recovery,periods,and generally shorter than the useful,life,those eight property classes are 3 5 7,10 15 20 27 and a half,and 39 recovery periods and these are a,number of years,for example for vehicles the,property class that vehicles are,assigned to is five years,which is way shorter than the useful,life of a typical vehicle if you buy a,car or truck,you're gonna use that truck for probably,more than five years but you can,depreciate that amount,from your income over five years which,is good,there's an important convention,with regard to macrs and that is half a,year convention,it's called happy year convention,because the first and the last years of,the recovery period are each assumed to,be half a year,and the reason for that is irs assumes,that,assets are purchased halfway through the,year regardless of its actual purchase,date,so if you're buying a truck for your,business this year,at the end of this year you can claim,for its depreciation for half of the,first year,regardless of if you bought it in,january or if you bought it in november,irs assumed that you only had it for six,months,same with the last year if you get to,the fifth year,of having your vehicle and you're filing,your taxes,you can only depreciate that for half of,that year,and rates for the first and last year,give only one half year of depreciation,so,if you're in n year recovery period,category,and when i'm saying any year recovery,period,i'm referring to these years if you're,in,any of these your depreciation requires,n plus one years to fully recover,because of the half a year convention,because the first year was half a year,the last year was half a year,so you're going to fully recover your,investment over in,plus one years so let's look at those,categories,right these categories that we had here,we have those categories listed here and,this is table 11.2 in your textbook,which gives you information about,the assets that fall into three-year,property,five-year property 7 10 15,20 27.5 and 39 and,and these two are for uh real estate,but besides real estate you have these,six categories and in front of each of,them,you can see some definitions some,information about,the categories that they belong to for,example computers,belong to five-year property that means,if you buy a computer for your business,you can deduct the total cost of that,computer,over five years from your taxes so that,helps us,with finding which property category,an investment belongs to there is,another table,which is table 11.1 in your textbook,and in this one you can see a more,detailed list of,assets and you can see their property,class here,on their gds general depreciation system,you know seven years five years and so,on,you can also see the class life or adr,asset depreciation range of those assets,which actually come very useful later,so how can you figure out,given an asset which property class it,belongs to,well here's the process either the,property class,given in the problem when you're solving,problems,if not you're going to look at table,11.2,which is this table for example if the,asset is computed,you know that is five years property,if you can't find it in that table you,go to,table 11.1 which is the second table,maybe you can find it in this list and,then you know the property class here,if not maybe the class life is given to,you,if the class life is given in the,problem then you can come,here and see hey property class with adr,class life of four years or less,they belong to three-year property or,property with adr class life of 10 years,or more but,less than 16 years belong to seven year,property,so that class life helps you to figure,out the property class,if none of these are given to you you're,just gonna assume,that it's a seven year property class,so that's the process that you need to,follow to find the property class,so finding the property class is the,first step,the good news is once the property class,is found,it's easy you can take a look at this,table,and the percentage of depreciations are,given,so the numbers in this table are all,percentages,let's say that your property is actually,a seven-year property class,that means in the first year you can,depreciate,14.29 of the cost basis,in the second year you can depreciate,24.49,and so on until year eight which is,n plus one years,of the property class and if you sum all,of these percentages,you can see that in each column they sum,up to 100 percent,which means regardless of any property,class you're going to,depreciate the entire investment over,those,number of years we'll look at one,example to make this clear,but this is for only those six,categories three years all the way to 20,year property,but if your asset is real estate,for rental properties excluding hotels,and motels,they have this table and,for commercial building hotels and,motels we have this other table,this is over 27.5 years,this is over 39 years and we will look,at these,two tables in more detail but to just,give you an idea,the year and the month are both,important,and that determines the percentage of,depreciation that you can use,and here you can see the first year and,then year two to year nine,year 10 to 26 11 to 27,28 and 29 and the month of your purchase,is also important that determines the,percentage here we'll look at some,examples to make this clear,so we're going to start with this,example the irs,classifies surface mount placement,machine as five-year equipment,so here the property class is directly,given to us,we know that we're going to have to look,at this column here,and use those percentages what are the,depreciation,charges for the smp machine if it is,purchased for 98,000 well you can calculate the,depreciation charges,over five years in fact n plus one six,years,using this table the depreciation of,first year would be,twenty percent times ninety eight,thousand dollars depreciation of second,year is thirty two percent times ninety,eight thousand dollars,and so forth you use these percentages,until last year year six,and this is actually what i did over six,years,you can see the percentage of their,deductions and you can see the amount,here,and every one is percentages,multiplied to the cost basis,and also book values are calculated here,book value of any year is book value of,previous year minus the depreciation,your,deduction of the current year and i,encourage you,to do this calculation to practike and,get familiar with these,tables and the calculations it's very,straightforward,we're going to look at another example,in the next video

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## Depreciation -MACRS

in this video I want to discuss the,MACRS depreciation method which stands,for modified accelerated cost recovery,system and it's the current tax,depreciation system in the United States,and under this system the capitalized,cost or the basis of the tangible,property is recovered over a specified,life by annual deductions for,depreciation and the lives are specified,broadly in the Internal Revenue Code,what it does is it allows firms to,recover the costs of capital equipment,faster than the straight-line approach,in a previous video I've discussed,straight-line depreciation which is,simply you deduct the same amount every,year here you're going to deduct more in,early years and less in later years one,of the things that you should note,that's different about MACRS versus the,straight-line approach is the salvage,value is not deducted when doing the,calculations it seems to be a common,mistake that is made when people do the,depreciation schedule all right right,here I'm going to show you an example of,some of the property classes there are,actually more but I couldn't squeeze,them all into a slide that would be,readable on the video okay there's three,year property and some of the things,that fall under three year property or,special handling devices for food and,beverage manufacturer special tools for,the manufacturer of finished plastik,products etc there's five year property,information systems like computers and,peripherals petroleum drilling equipment,etc so the IRS specifies what table you,should use for the depreciation so you,don't make it up you don't decide okay,I'm going to use you know five years for,you know my other office furniture no,they say that seven-year property so,have to go with whatever they tell you,you should be using this is what the,table looks like okay again I've only,shown you a few of them three or five,years seven years but there are other,depreciation schedules based on the,asset class there are a few footnotes,here three five seven and ten year,classes use two hundred percent and the,fifteen and twenty year classes use a,hundred and fifty percent declining,balance depreciation alright which is a,depreciation method you may have covered,in accounting class double declining,balance and there again another,accelerated depreciation approach they,point out that all classes convert to,straight-line depreciation in the,optimal year shown with the asterisk so,in for three-year equipment that's in,year three for five years that's in year,four for seven year that's in year five,you'll notike that something odd is here,we said this is three year depreciation,but there are four years here and the,reason for that is that they use a half,year convention which means that the,first year is it's assumed that you put,the property into use on July first the,middle of the year so you only get half,a years depreciation there and in the,final year you get another half-year so,these are this is full year or full year,and these two are half year and that,adds up to three years so you notike the,same thing with five year there are six,years here even though it's a five year,schedule for the seven year there are,eight periods or eight years even though,it's a seven years depreciation schedule,for that half year convention alright,let's take a look at an example suppose,you have a piece of equipment that costs,a million dollars and has a salvage,value of 200,000 let's find the,depreciation each year assuming the,equipment as a useful life of five years,let's also compute the book value for,each year and the after-tax salvage,value if you sell the equipment in year,three for four hundred and twenty five,thousand and let's assume,the tax rate is 35% so I've recreated,that five-year schedule here and what,you're going to do is you're going to,take 20% of the million dollar cost of,the equipment which is 200,000 again you,don't subtract out the salvage value in,which case this would be a smaller,depreciation amount you take the two,hundred thousand that's depreciated from,the original book value which was a,million dollars and you have an eight,hundred thousand dollar book value in,year one in year two 32% of the million,is three hundred twenty thousand so,these percentages are always times the,original cost that's three hundred,twenty thousand subtract that from the,new book value which was eight hundred,thousand you have a book value four,hundred and eighty thousand etc etc okay,notike that it depreciates it to zero if,you were to have subtracted out the,salvage value you would find that you,would only depreciate it down to that,salvage value that we had listed okay so,we said let's also calculate the,after-tax salvage value or the after-tax,cash flow if you sell this piece of,equipment for four hundred and twenty,five thousand dollars in year three now,you're going to sell it for four hundred,and twenty five thousand but there's a,tax consequence the tax consequences,you're going to have possibly a capital,gain or a capital loss what does that,mean that means that you're selling it,for more or less than it's worth in this,case the book value is two hundred and,eighty eight thousand but you're selling,it for four hundred and twenty five,thousand so you have a capital gain here,and you're going to be taxed on that and,we assume the tax rate was thirty five,percent now again a common mistake,that's made is people think that you get,taxed on the full four hundred and,twenty five thousand that's not correct,you get taxed on the the amount of the,capital gain,you're selling it for above the book,value so in this case you're going to,pay forty-seven thousand nine hundred,and fifty dollars in taxes and so your,after-tax salvage value or after-tax,cash flow is going to be three hundred,and seventy seven thousand and fifty,dollars okay so if you're doing some,sort of analysis where you're looking at,the cash flow from selling this it's,going to be three hundred seventy seven,thousand and fifty dollars let's take a,look at one other example suppose you,can only sell the equipment for two,hundred thousand okay the book value is,two hundred and eighty eight you're,actually selling a capital loss well it,turns out that you're going to have some,tax savings here of thirty thousand,eight hundred okay you're going to have,an eighty eight thousand dollar capital,loss times thirty five percent so you're,going to save thirty thousand eight,hundred dollars in taxes so your cash,flow is going to be two hundred and,thirty thousand eight hundred dollars,alright to summarize the MACRS allows,firms to recover the cost of new,equipment faster than the straight-line,method I think and the logic for that is,is that if the firm can get their money,back faster they can reinvest in new,equipment new plants can create jobs etc,the IRS specifies the useful life of the,different types of equipment and they,also provide the schedules based on,those useful lives and as I mentioned,before the MACRS uses this half year,convention which assumes that the,equipment is acquired on July first,therefore the first and the last year,use half the depreciation okay so it's,only half years worth of depreciation,for example again the three-year useful,life will be depreciated over four years,so this is a useful depreciation method,to know if you're doing analysis this is,the method you should use because this,is the actual schedule that the IRS,provides and that you use when you're,doing your taxes

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## Depreciation Accounting (MACRS Depreciation, Modified Accelerated Cost Recovery System)

here are just been going over an,overview of this makers tax depreciation,system and this is a requirement here by,the Internal Revenue Service of the,United States government for,corporations when they're depreciating,their assets here for tax reporting,again what does this maker stand for,well that's the stands for the modified,or accelerated cost recovery system here,so that's the abbreviation here for it,and what corporations normally do is,they're using gap here for their book,depreciation but for tax reporting and,taxes they have to use this maker system,okay so the makers depreciation tax,basis it has three main elements here,number one it has a mandated tax life,generally shorter than the economic life,so for GAAP they're using the economic,life of the asset and for makers here,they're using a tax life and that's a,predetermined life here by asset,category or whatever your asset is they,have a predetermined tax life for it,number two the cost recovery is on an,accelerated basis in number three and,assigned salvage value of zero to your,asset here you depreciate your asset to,a zero value no salvage value at the end,of the makers life here so let's just go,and look at a typical text a table here,and we're just these are the percentages,or of depreciation that you are allowed,here per year here in this case so first,off let's just look at it here identify,the elements and then we're going to,look at the definition of these so what,we would have here of course we have our,years shown here and then we have a,partikular or specified percentage of,depreciation allowed here for each of,the each of those years here by a class,here and property class what we're,toking about peers is 3 5 7 and so on,here these are called property classes,and what we mean by that is each group,of assets or the government would have,the IRS would have defined here like for,a three year life that might include,they'd have a listing of assets here,that might be tooling or some small,equipment for the shop or in the office,desk computer,and so forth and then as you move down,the chart here each of its identified,here as a property class here by number,of years here and that's the,depreciation here years here on those,asset classes you might get up to five,years here cars or trucks or something,like that and then seven years might be,other like machinery or equipment or,something like that and then okay Eve so,you've got your property class,identified here and then you would have,the depreciation method here either we'd,have a decline it would be declining,balance most of the time here there are,some options here and then for the,method you'd have your partikular,convention like for example here the,declining balance we're looking at on,this tax depreciation table here as,percentage a mid-year or a half-year you,could also have like a quarter of a year,as well so that would it requires a,different tax table here so let's go and,look at our definitions here so again,Maker's depreciation you reference the,IRS publications here for determining,how you depreciate your asset here for,this maker system so a here you have,these different options here so for a,that's a general depreciation system,it's referred to as GDS or you have B,here and an alternative depreciation,system that would be identified as 80s,and then we have two different methods,here number one you have the declining,balance that would be like for your,mid-year in your mid quarter,depreciation and number two here you,have a straight-line option you have an,option to go to the straight-line and,that could be like for the mid-year mid,quarter or mid month and what do we mean,by mid here mid means whatever period,the asset is placed in the surface you,use the middle date for that period so,for example if we're looking for,mid-quarter we'd have to identify which,quarter say it was the fourth quarter so,then we would have October November,December and when we mean by mid quarter,we be using the middle of the quarter or,November 15th as our depreciation date,here and then the other item here each,item of depreciable property belongs to,a property class here,define life so what we were toking,about before the property class for,example a car or truck that's being,depreciated it would go into a,partikular property class here or have a,defined life according to our,depreciation chart and just looking at,what's tied in here so this maker,property class we have them say,partikular property classes here and,what they're what's tied into this here,the depreciation method depends on the,property class so whatever a,depreciation method you have depends on,partikular property class and just,showing here in general terms here are,say are a three five seven and 10-year,property here you use a two hundred,percent declining balance here according,to the IRS depreciation percentages per,their charts here and then for like,fifteen and twenty year property you use,150 percent declining balance and then,the twenty seven and a half to 39 year,property here classification here you,use a straight line here and then one,last point here the recovery period for,most property generally are longer under,the 80s option here then they are under,the GD s here so let's go back to our,table tax percentage table here again,this here let's just go over here in a,little bit more detail word have the,property class remember property classes,define by years here like we got three,or five years seven ten fifteen and,twenty and then the method here well in,this case we're looking at this table,here it's a declining balance and then,we have the convention here in this case,it's a mid-year or half year convention,so when you're setting up your,depreciation here you have to determine,select the proper table here based on,the method here that you'd be using like,declining balance here and there are,options here for straight line and then,the convention well it depends if you're,toking about mid-year vs. mid-quarter,each one of them has its own a table,here for depreciation okay let's look at,it a little closer here so,we've got our years here and then for,each year we have the percentage of the,depreciation allowed here and the point,we want to make here is that our these,are our depreciation rates here by year,here,that are allowed and then we depreciate,our asset to a zero value see these,tables are set up sets that you take,your whatever property class or assets,you have it depreciates it down to a,zero value there's no salvage value just,depreciate it it totally down to a zero,value here and you're going to notike,here it does it through what they call a,switch over to the straight-line,depreciation and the tables have built,into them those percentages so you can I,got them just marked here you'll see a,constant percentage like and under the,seven-year you'll see a point eight,point nine two five percentage and,you'll see them in three years in a row,well that's based on this switch over to,straight line such that you depreciate,your asset down to a zero amount and so,all you have to do is pick out your,define which would whatever ask that you,have define the property class here make,sure you got the proper method table,method here for the table for the,property method that you were using and,then the proper convention be it a,mid-year or a mid quarter so forth then,okay we went over this switch over to,straight-line depreciation so if you see,these in the table that constant,percentage for a number of years in a,row you know why because you're,switching over here such that you get a,zero depreciate your own asset value at,the end here of the SR at the end of the,property class or the assets life here,and then again remember these tables,here you have to reference them to a IRS,here these tables are published they're,published all over ya on the internet,and so forth go and you reference the,table here and make sure you get the,proper method here and for t

## Depreciation 101: What is MACRS?

it's a fact of life assets used in,business break down wear out or become,obsolete over time that's one of the,reasons we depreciate business assets,both for accounting and tax purposes,this video is the first in a series of,videos on depreciation with a focus on,the IRS method of calculating and,claiming depreciation the modified,accelerated cost recovery system or,makers I'm the tax geek and here is,Makers oversimplified,[Music],now I've covered depreciation on this,channel in an earlier video but that,video concentrated on depreciation of,rental property this series will present,depreciation as it applies to all sorts,of assets used for the production of,income so before we go into detail on,makers let's ask the question why do we,depreciate assets it's not simply that,business assets wear out over time,depreciation is a key part of the,matching principle which is a generally,accepted accounting principle that,states that business income be as,closely matched with Associated expenses,as possible so if you purchase an asset,for your business with a useful life of,five years and deducted the cost of it,from your income as an expense in the,year it was purchased your business's,net income would be substantially,understated in the year you purchased,the asset and significantly overstated,in the other four years this is not a,realistik depiction of net income,depreciation really has nothing to do,with the fair market value of the asset,instead depreciation reflects a loss of,usefulness over time,it is not unusual to depreciate an asset,that increases in value such as a,building it is also not unusual for an,asset to have value and continue being,used for some time after its cost has,been recovered by depreciation,one asset that rarely loses usefulness,is land so land is never subject to,depreciation,of course the simplest way to recover,the cost of an asset is evenly,throughout the asset's predicted life,and this method is called the straight,line method but accountants generally,agree that most assets depreciate faster,in their first few years of ownership,and as such have devised a number of,additional depreciation methods to,account for this phenomenon,the depreciation methods accountants use,to prepare financial statements don't,need to and usually don't match the,depreciation method used for tax,purposes,the IRS groups all its allowable,depreciation methods under one umbrella,called makers which as I said earlier,stands for modified accelerated cost,recovery system makers eliminates most,guesswork involved in calculating and,Reporting depreciation for tax purposes,by establishing standardized recovery,periods and depreciation methods to,calculate depreciation under makers you,look up the assets recovery period in,one table look up the appropriate,depreciation percentage in another table,and multiply that percentage by the,adjusted basis of the asset,recovery periods can be found in one of,two tables table B1 organizes assets by,General type and table B2 by industry,the recovery period you'll most often,use is in column two of the table under,GDs or general depreciation system in,column one you'll find the asset life,for accounting purposes and column 3,shows the recovery period under ads or,the alternative depreciation system in,this video we're going to focus entirely,on the GDs and save the ads for another,video,most of the time for property that it's,not real property table A1 is used to,find the annual depreciation percentage,except for real property we usually,assume that business assets are required,halfway through a given year so that,means we depreciate assets for one more,year than the listed recovery period so,for an asset with a recovery period of,five years we take one half years,depreciation in the first year followed,by four full years of depreciation and,then finally one half years depreciation,to fully recover the cost the A1,depreciation table takes these half,years into account,let's put all this together and see how,it works Alice and Ralph have a bakery,and in April of 2021 they purchased a,new oven for 4 369 including,installation Consulting the recovery,life table they see that a useful life,of equipment used in food manufacturing,is 12 years but makers GDs allows a,recovery period of seven years then they,consult appreciation table A1 and see,that for the first year they can take,14.29 of the oven's 4 369 dollar basis,or 624 dollars as a depreciation expense,in 2022 they would be able to take 24.49,of the basis or 1069 as a depreciation,expense,let's see how this is reported on their,tax return ordinary depreciation is,reported on form 4562 part 3. here is,Allison Ralph's form 4562 for 2021,showing the first Year's depreciation,for the oven if say they had also,purchased a mixer also with a recovery,period of seven years for two thousand,seven hundred fifty dollars they would,have added the depreciation for both,items together on the same line,if they had also purchased a display,counter which has a recovery period of,five years the depreciation for that,item is listed separately then all the,figures are totaled,so let's fast forward to 2022 in 2022,they had depreciation for all the assets,they purchased in 2021. the total of,this depreciation is reported on line 17,of part 3. in 2022 Alison Ralph,purchased a commercial refrigerator at a,cost of 5225 the first year depreciation,for the refrigerator is listed here and,all the depreciation is totaled since,Alice and Ralph have a partnership their,total depreciation is entered on line 16,of their form 1065. depreciation can,also be ended on line 13 of Schedule C,on line 18 of Schedule E Line 14 of,schedule F and line 14 of form 1120s,there are other places where,depreciation can be entered on a tax,return but these forms are the most,common for small business people,you can now see it is very important to,keep careful track of any depreciation,you take this is done using a,depreciation worksheet which is not sent,with your tax return but instead kept,with your records if you use a computer,to prepare your taxes the software will,automatikally prepare a worksheet for,you and if you use a paid preparer he or,she should provide you with one,if you decide to change software or paid,preparer it is essential to have this,worksheet so the new software or,preparer can properly calculate your,depreciation for subsequent years,these are the very basics of,depreciation and you'll notike we,skipped parts one and two of form 4562,in the next video in this series we'll,look at ways to write off the entire,cost of an asset in the first year of,ownership the Section 179 deduction,bonus depreciation and the de minimis,election in the meantime you will find,additional information and resources in,the video description if you found this,video informative giving it a thumbs up,makes YouTube look favorably upon the,video and show it to others and if you'd,like to keep getting smarter about your,taxes Please Subscribe of course your,questions comments and suggestions are,always welcome in the comments space,below thanks for watching and I'll be,back soon with more of your taxes,oversimplified,foreign,[Music]

## Implementing MACRS Depreciation in Excel

hello everyone and thanks for joining me,here,uh we're going to be looking at this,example,in which uh we need to implement macrs,depreciation method,and this one says a 120 metric ton,at telescopic crane that costs 320,000 is owned by upper state power and,has an estimated life of 10 years,develop two depreciation schedules using,straight line,depreciation method depreciating to zero,over the useful life,and macrs assuming that this device,is a seven year property,so we're going to implement both the,straight line depreciation,and macrs in excel,excel only allows us to do this more,quickly you can do that by hand,as well in fact i encourage you to do it,by hand,in addition to what you do in excel so,let's switch over to excel,[Music],here we're looking at 10 years,these are end of year cash flow that you,can see here,and for straight line method i'm going,to calculate depreciation deduction,as well as book value for each year,so as you know a straight line method,is depreciating the asset using equal,amounts,over their life life is 10 years,and the book value or cost basis,is 320 000 so for each year,the amount of deduction is,220 000 divided by,10 years which is 32 000,so following the straight line,depreciation method,this is a cost basis and i'm going to,lock this cell using f4 button,so that later when i copy down this,calculation,it will not iterate to the next cell,minus the salvage value which is zero,divided by 10 which is the useful life,so you can see 32 000 and that is going,to repeat for 10 years and the book,value,at the end of each year is the book,value of previous year,minus the deduction of the current year,and you repeat that,every year in fact you can,copy down that calculation,as well and as you can see in this graph,the straight line depreciation as we,expected,is depreciating the asset from 320 000,to zero over 10 years with equal amounts,of depreciation,let's go and do the macrs depreciation,since it's a seven year property class i,took the,percentage of depreciation from the,macrs table,as you know the macrs table is here and,these percentages,are the ones that we need to use for,this asset it's a seven year property,class,so we're going to use these percentages,which depreciates the,asset over eight years remember eight,years because,of the half a year convention for seven,year property class it takes,eight years to depreciate fully,so we are having the percentages here,and deduction for each year,is the cost basis again i'm pressing f4,here,to lock the cell multiplied to,the percentage deduction and,you do the same for every year you,multiply the cost basis,to the percentage,of the macrs for that year and if you,uh copy down this calculation you can,see that,the deductions are calculated for eight,years and,the book value for each year is the,previous book value,minus the current year deduction,and if you copy that down it's going to,get to zero and here is the,deduction graph for macrs,in addition to these two methods i just,want to do,depreciation using double declining,balance so we can,see that with respect to these two,methods straight line and,macrs and for double declining balance,we know the formula for depreciation,deduction for each year,it's the percentage and if it's the,double declining balance it's,2 divided by useful life which is 10,years here in this case so 2 divided by,10,is 0.2 for the p you know the cost basis,that's 320,000 and t is the current period,so it changes from year one to year ten,but in excel there is a function for,calculating double declining balance,depreciation that is ddb,double declining balance and when you,use that function,it needs certain parameters that you,need to pass in,the first one is cost basis as you can,see,and we need to select,the cost basis again i'm locking in that,cell,salvage value is zero a,third argument that we need to pass is,the life,that is 10 years and the last,one is period and since we're now in,period one,i'm just going to select one here,or cell one and then once i copy down,this calculation,it's going to go to year two year 3 and,all the way to your 10.,but because i locked the cell,this cost basis doesn't change,so i'm copying this down,and i'm also calculating the book value,again,and here we are this is the,depreciation deduction over the years,for,double declining balance and you can,clearly see that,the macrs has a,more aggressive and accelerated,depreciation deduction,for example for year four if you look at,the,book value at the end of year four for,macrs,is lower than double declining balance,and a straight line,and that is good for tax purposes so you,want to,depreciate your asset as soon as,possible as much as possible,so macrs is always the best method among,them,and you can validate what i'm saying,here,the sum of depreciation deductions for,10 years using these methods,can be calculated here but what's more,important is the present,value of these depreciation deductions,over the years,so you want to have a larger present,worth of deductions,that means you were able to deduct,more from your gross income,given the time value of your money which,is in this case you want to use 10,percent,so you can use a npv function,which is calculating the net present,value of,a series of cash flow given a rate,so we have to give the rate and that is,10 so i'm indicating the rate and now,i'm just,selecting the values and the cash flow,and if i press enter here that's going,to calculate the net present worth of,deductions for me,and here it is it's about 196 197,000 although the sum of the deductions,was 320 000 i'm going to go ahead and,calculate these two,sum and present worth of depreciation,deduction for macrs,and depreciation deduction for double,declining balance,and we can compare them in fact you can,copy this across and it's going to,repeat that calculation for all of these,columns,but we only need them for the,depreciation,deduction column so here you can see,the sum of deductions and present worth,of deductions for these three methods,and as we know macrs gives you the,largest,depreciation deduction and that is,indicated,by looking at the present worth of these,deductions 230 000,which is bigger than all those other,methods,of depreciations and that again is of,course,what a taxpayer wants a corporate,wants to be able to reduce their gross,income as much as possible,so their taxable income will be lower,and they,pay less taxes and macrs method,allows them to maximize the depreciation,and benefit from that