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The rules for computing depreciation are complicated. Therefore, this section is designed to provide an overview of the depreciation process but should not take the place of more thorough reading or the advice of an accounting professional. If you want to read more about depreciation, I recommend the Internal Revenue Service Publication 946, "How to Depreciate Property," which is available online at www.irs.gov or by calling the IRS at 1-800-TAX-FORM.

Most assets are expensed for tax purposes using the Modified Accelerated Cost Recovery System (MACRS) method of calculating depreciation. Under MACRS, the cost of an asset is expensed over a period of years based on percentage tables provided by the IRS. The accelerated method of depreciation produces a greater expense in the earlier years of asset use. A different depreciation method, such as a straight-line method, can be used for financial statement presentation.

Here are sample MACRS percentage tables for five-year and seven-year assets. Five-year assets include automobiles and trucks, computers, and other office equipment. Seven-year property includes office furniture and fixtures.

MACRS Depreciation Expense for Five-year Property:

Year

Percentage

1

20%

2

32%

3

19.2%

4

11.52%

5

11.52%

6

5.76%

MACRS Depreciation Expense for Seven-year Property:

Year

Percentage

1

14.29%

2

24.49%

3

17.49%

4

12.49%

5

8.93%

6

8.92%

7

8.93%

8

4.46%

Note: The previous tables employ the half-year convention. Under this convention, all property is treated as if it is acquired and disposed of at the midpoint of the year.

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