Modified Accelerated Cost Recovery System (MACRS) depreciation is supported for Capital Asset Planning

Description

This method is mandated by the IRS for most tangible assets. Although this method is specifically for tax purposes, it can also be used in planning. It allows businesses to depreciate their assets at a faster rate early in their lifespan.

Example Use Case

Scenario: An enterprise-level manufacturing company uses a variety of heavy machinery as capital assets. These assets depreciate over time and the company utilizes MACRS for tax depreciation purposes.

Solution: By using CPM software that supports MACRS depreciation, the company can automatically calculate and record the depreciation values. For example, if a machine worth $300,000 is purchased and has a depreciation life of 5 years under MACRS, the software will calculate and reflect the changing depreciation each year in capital asset planning and budgeting.

Considerations

This is a more complex calculation that most CPM tools handle out of the box. It requires understanding the General Depreciation System (GDC) table, which associated a timeframe with a depreciation rate. The CPM system must have that to start, and only then can it calculate the depreciation over time. This “table” can be stuffed into a formula, but it will be challenging to maintain.

For Example:

Let's consider a company that purchases new office furniture for $10,000 and uses MACRS for tax depreciation.

Step 1: Determine the Property Class

• Office furniture is typically classified under the 7-year property class under MACRS.

Step 2: Select the Appropriate MACRS Depreciation Table

• For a 7-year property, we use the MACRS depreciation table specific to the General Depreciation System (GDS).

Step 3: Apply the Depreciation Rates

The MACRS GDS table for 7-year property provides the following depreciation rates:

1. Year 1: 14.29%
2. Year 2: 24.49%
3. Year 3: 17.49%
4. Year 4: 12.49%
5. Year 5: 8.93%
6. Year 6: 8.92%
7. Year 7: 8.93%
8. Year 8: 4.46% (Accounting for the half-year convention)

Step 4: Calculate Annual Depreciation

Using the original cost of the asset ($10,000) and the rates from the MACRS table:

• Year 1 Depreciation: $10,000 * 14.29% = $1,429
• Year 2 Depreciation: $10,000 * 24.49% = $2,449
• Year 3 Depreciation: $10,000 * 17.49% = $1,749
• (Calculation continues for the remaining years.)

Example Summary

The depreciation schedule for the first three years under MACRS for the office furniture would be:

• Year 1: $1,429
• Year 2: $2,449
• Year 3: $1,749

If you are interested in this for planning, we recommend you ask the vendor to show it, and show how the calculation is output and where the values land over a period of time.

Questions to Ask a Vendor

• Method Availability: Does your system support the MACRS depreciation method for capital assets planning?
• MACRS Table: Where do we store the table used to calculate depreciation for this method? What if new guidelines require us to edit it?
• Use: Is this as simple as selecting this method when adding or editing an asset?
• Calculation Flow: Is there somewhere we can see the resolved calculation?