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Depreciation Methods

An asset's basis is the maximum amount of investment in an asset that can be subtracted from income as a capital recovery. The depreciation rules in effect when an asset is placed in service determine the depreciation method to be used during the life of the asset. An asset is placed in service when it is set up and ready for its intended use for a business purpose.

Detailed Information

For assets placed in service prior to 1987 the depreciation method that should be used is the Accelerated Cost Recovery System (ACRS). Assets placed in service after 1986 are depreciated under the Modified Accelerated Cost Recovery System (MACRS). You cannot change to MACRS for property placed in service prior to 1987 that is being depreciated under another method such as ACRS

The primary difference between the two systems is that MACRS specifies longer recovery periods for depreciable assets, which results in slower depreciation than allowed by ACRS. There is a direct correlation between the useful life of an asset and the size of the depreciation deduction in a given year. The longer the useful life the smaller the deduction becomes. And as a general rule, the earlier you can claim a depreciation deduction, the greater its present value.

For more information on depreciation and depreciation methods please refer to IRS Publication 946.

Modified Accelerated Cost Recovery System (MACRS)

To simplify the depreciation calculation the IRS has developed tables which incorporate the recovery period, depreciation method and the specific conventions to be used in the acquisition and disposition year. Under MACRS an asset's depreciable basis is multiplied by a percentage obtained from one of the IRS tables to determine the depreciation deduction. The tables can be found in IRS Publication 946, How to Depreciate Property.

Note: The IRS Tables are in PDF format, if you do not have Adobe Acrobat Reader you may need to install it

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