What is the MACRS formula?

Answer 1

T = the depreciation life of an asset

UDC = The Un-depreciated cost of the asset

n= the nth year of the assets life

A= 2 if T = 3, 5, or 7

A= 1.5 if T = 15, or 20

The MACRS rate for the nth year of the assets life is:

If n = 1:

MACRS Rate = 1/T

If n > 1:

MACRS Rate = A / T * ( 1 - 1 / T ) * ( 1 - A / T ) ^ ( n - 2 )

If MACRS Rate < Straight Line Method Rate:

start using straight line

DISCLAIMER:

1) This does not match exactly with the IRS Publication946

If you read that publication, they indicate that the actual formula does not match their MACRS tables. I suspect that their tables are built to control round off errors.

The method below, differs from the IRS tables by no more than 0.01%.

2) There is not an actual formula, but I have this as a sub-routine in my computer written in C++. If you want, I could translate it into something a bit more generic such as BASIC. If there is requests, I can post the actual code.

To Calculate MACRS

Using UDA = UnDepreciated Amount

The Basic MACRS = UDA / Number of years to Depreciate

But, the Second and subsequent years are DOUBLED.

So for an item of $1000, 5 year depreciation ( 60 months ), Bought sometime in 2001

Year 2001, the MACRS = 1000/5 = $200.00 -- UDA is now $1000-$200 = $800

Year 2002, the MACRS = 2*800/5 = $320.00 -- UDA is now $800 - $320 = $480

Year 2003, the MACRS = 2*480/5 = $192.00 -- UDA is now $480 - $192 = $288

Year 2004, the MACRS = 2*280/5 = $115.20 -- UDA is now $288 - $115.20 = $172.80

For you math majors, you might see that this is a log decay curve and goes on forever, never to end. But, the IRS has a neat solution. When the UDA is less than the first years depreciation ( In this case, $200.00 ) you use a straight line method. So...

Year 2005, the MACRS = $115.20 -- UDA is now $172.80 - $115.20 = $57.60

Year 2006, the MACRS = $57.60 ( You are DONE )

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NOTE: You must consider the Salvage Value of the property

Therefore: UDA at the start is = The Cost of the Item - Salvage Value

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Reference:

MACR Table: http://www.studyfinance.com/lectures/depreciation/macrs.mv

IRS Pub 946: http://www.irs.gov/publications/p946/ch04.html