MACRS Straight Line Election

MACRS Straight Line Election The business can elect to use straight-line depreciation instead of the accelerated method in Table 1. The time periods stay the same as for MACRS, and the half-year convention is still in use. A business may choose this method if they believe they will have much higher profits in the next few years, so they want to preserve write offs for those years. So, for a 5-year asset, for financial accounting each year would be 20%, but with the MACRS half-year convention, it would be 10% in year 1, 20% in years 2 through 5, and 10% in year 6. Alternative Depreciation System (ADS) ADS is another alternative to MACRS, with longer time periods and straight-line depreciation. This enables the business to stretch their depreciation deductions over even longer periods that would be useful if the profitable times are expected to be several more years in the future. Going back to the earlier partial class lives table , the last column is headed "ADS" and shows the longer depreciation lives for common types of personalty assets. Comparing that last column to the one next to it, labeled "GDS," shows the longer lives assumed for most assets. While computers and automobiles stay at 5 years, office furniture jumps from 7 to 10 years. Please be aware that ADS is the required depreciation system for the Alternative Minimum Tax (AMT), so businesses subject to AMT may choose to use ADS to minimize the extra taxes. Special Rules The final category of personalty is listed property. These are types of assets that are believed to be prone to cheating, so the IRS requires that they be listed separately on the back of Form 4562. Included in this category are automobiles and other transportation property, such as boats and motorcycles, as well as computers and peripheral equipment, such as printers and scanners. The IRS requires businesses to maintain a contemporaneous record of usage to substantiate the business usage claimed. If the business uses the asset for both business and personal purposes, the type of depreciation depends on the percentages. If business use is 50% or less, the business must use ADS on the business portion. If business use is more than 50%, treat the business portion like any other personalty asset, with GDS available. Luxury Automobiles The amount of depreciation businesses can take on automobiles, trucks, and vans is limited. This limit is adjusted annually for inflation, so the numbers will change. For 2023, depreciation is limited to $19,200 of which $8,000 may be bonus depreciation. This limitation is to prevent taxpayers from purchasing luxury automobiles, such as a Ferrari, and writing it off as a business expense. This limitation does not apply to vehicles over 6,000 pounds such as a large SUV, delivery truck, or van. If business use is less than 100%, multiply the relevant limit by the business use percentage to get the applicable limit. For example, if business use is 40%, the limit would be 40% of $12,200 or $4,880. Basically, the depreciation would be calculated normally with the resulting figure subjected to the applicable limit.
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