MACRS Formula Example

In March 2007, a company places in service a network server for which it paid $5,000. Under MACRS, the asset has a 5-year estimated life.

For MACRS personal property, the applicable convention (provided that the midquarter convention does not apply) is a half-year convention allowing a half-year's depreciation in the year of acquisition and disposal.

To determine the rate for the declining-balance computation, you divide the MACRS rate (200%) by the asset's estimated life (5 years).

200% = 40%

The system calculates the depreciation allowance for the computer as follows:

Year 1 ($5,000 x 40%) x ½ = $1,000

This first year depreciation would be spread evenly over the months in the year that this asset is in service. In this example, 1,000 divided by 10, or $100, would be the monthly allocation.

The remaining years would have recovery calculations as follows:

Year 2 ($5,000 - $1,000) x 40% = $1,600

Year 3 ($5,000 - $2,600) x 40% = $960

Year 4 ($5,000 - $3,560) x 40% = $576

Year 5* ($5,000 - $4,136) / 1.5 = $576

Year 6 [($5,000 - $4,136) / 1.5] x ½ = $288

* In year 5, the system automatically switches to a straight-line calculation, which allows for a higher recovery rate than the declining-balance calculation.