Final answer:
The MACRS method, established by the IRS for depreciation expense, is a system of accelerated depreciation allowing for greater deductions in the initial years of an asset's life. Tables provided by the IRS guide businesses in calculating annual depreciation to reduce taxable income.
Step-by-step explanation:
The MACRS method of determining depreciation expense has been established by the Internal Revenue Service (IRS). MACRS stands for Modified Accelerated Cost Recovery System, and it is the current tax depreciation system in the United States. Under this system, the cost of tangible property is recovered over a specified life by annual deductions for depreciation. The MACRS system applies to most tangible depreciable property placed in service after 1986.
When calculating depreciation using MACRS, the IRS provides a set of depreciation tables that outline the percentage of the asset's cost that can be deducted each year. This percentage varies depending on the asset's class and recovery period. There are different classes, such as 3-year, 5-year, and 7-year properties, each with its own depreciation schedule. This allows for a more accelerated depreciation expense in the initial years after the asset is placed in service.
Businesses use the MACRS method to calculate their annual depreciation deduction, which can reduce their taxable income. It's often used for assets like machinery, equipment, vehicles, and buildings. Understanding and correctly applying the MACRS method is essential for tax planning and compliance.