Tax Depreciation
Lecture No.23
Professor C. S. Park
Fundamentals of Engineering Economics
Copyright © 2005
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
Modified Accelerated Cost Recovery Systems (MACRS)
•
Personal Property
 Depreciation method based on DB method
switching to SL
 Half-year convention
 Zero salvage value
•
Real Property
 SL Method
 Mid-month convention
 Zero salvage value
MACRS Property Classifications (IRS Publication 534)
Recovery Period
ADR Midpoint Class
3-year
Applicable Property
Special tools for manufacture of plastic
ADR  4 products, fabricated metal products, and
motor vehicles.
5-year
7-year
10-year
15-year
4  ADR  10
10  ADR  16
16  ADR  20
20  ADR  25
20-year
25  ADR
Automobiles, light trucks, high-tech
equipment, equipment used for R&D,
computerized telephone switching systems
Manufacturing equipment, office furniture,
fixtures
Vessels, barges, tugs, railroad cars
Waste-water plants, telephone- distribution
plants, or similar utility property.
Municipal sewers, electrical power plant.
27.5-year
Residential rental property
39-year
Nonresidential real property including
elevators and escalators
ADR: Asset Depreciation Range
MACRS Table
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% 32%
19.20% 11.52% 11.52% 5.76%
$2000 $3200 $1920 $1152 $1152
Full Full
Full
1
2
3
4
Half-year Convention
$576
Full
5
6
Year (n)
1
2
Calculation in %
(0.5)(0.40)(100%)
(0.4)(100%-20%)
DDB
DDB
SL = (1/4.5)(80%)
3
(0.4)(100%-52%)
MACRS (%)
20%
32%
17.78%
DDB
SL = (1/3.5)(48%)
19.20%
13.71%
4
(0.4)(100%-71.20%) Switch to SL 11.52%
SL = (1/2.5)(29.80%)
11.52%
5
6
SL = (1/1.5)(17.28%)
SL = (0.5)(11.52%)
SL
SL
11.52%
5.76%
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 1,152 576
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.
Find the depreciation allowance in year 1.
D1 = (9.5/12)(100%/27.5)
= 2.879%
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
100%/27.5
3.6364%
4
100%/27.5
3.6364%
5
100%/27.5
3.6364%
6
100%/27.5
3.6364%
7
100%/27.5
3.6364%
8
100%/27.5
3.6364%
9
100%/27.5
3.6364%
10
(11.5/12)(100%/27.5)
3.4848%
Assume that the property will be sold in December of the10th year.