Tax Depreciation Methods

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The Internal Revenue Service provides specific methods for expensing business property that has a useful life of longer than a year. The tax rules are specific as to the types of assets that are depreciated as well as the method used. In 1986, an overhaul to the uniform tax code streamlined the depreciation process and cut back on the amount of depreciation methods available.

Modified Accelerated Cost Recovery System (MACRS)

The MACRS method of tax depreciation is used for all depreciable assets except: specific assets used in 1986, assets placed in service before 1987, intangible assets, film, videotapes, recordings, specific corporate or partnership assets gained through nontaxable transfer and other assets that allow an alternate deduction method. The MACRS depreciation method allows a larger deduction at the beginning of an asset's useful life, making the method an accurate reflection of the value of assets after purchase.

Accelerated Cost Recovery System (ACRS)

If the ACRS method yields a higher deduction than the MACRS method in the first year an asset is in service, the taxpayer may elect the ACRS method. The ACRS method was the primary method of depreciation for assets placed in service before 1987, and is used to complete the depreciation of those assets. The ACRS method replaced the straight-line method for most asset types and shortened the useful life of assets, allowing for larger deductions.

Straight Line Method

The straight-line method of depreciation is usually applied to intangible assets such as patents, copyrights and software. The straight-line method is calculated by simply taking your basis in the asset and dividing by the number of years of useful life, yielding the same amount of deduction for each year the asset is in service.

Income Forecast Method

The income forecast method of depreciation is usually applied to intangible assets such as motion picture films, videotapes, patents, books, copyrights and sound recordings. The income forecast method depreciates assets based on the amount of income they have earned versus the budgeted amount of income to be earned. For example, if a book earns $5,000 in a tax year but is budgeted to earn $10,000 over its useful life, then 50 percent of the asset cost is depreciated in that tax year.

Declining Balance Method

The declining balance method is similar to MACRS in that it allowed a larger deduction for depreciation in the earlier years of an asset’s useful life. The declining balance method is only used for assets that elected the method and were placed in service before 1987.

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