Question

Wear and tear due to long production runs and frequent technology changes, theclient usually replaces the equipment every two years. According to IRS guidance, the MACRS lifeof the equipment is five years. In order to accelerate depreciation deductions, which taxdepreciation option should the client elect?

Answer 1

The client should choose sum of the year digits option

Step-by-step explanation:

To begin, an accelerated depreciation is a style of depreciation used for income tax purposes, and thus allow for greater deductions in the earlier years of the life of an asset. The underlying method of accelerated depreciation is to for deductions of higher expenses in the first year after purchase, and thus lower expenses, as the depreciated item ages.

One of the tax depreciation options to choose from include:

- Sum of the year digits option: here, all the digits of the expected life of the item are combined.

E.g. an item with the expected life of 5, will have its base like - 1+2+3+4+5=15

Thus, the first depreciation year is expected to be computed as 5/15 of the depreciable item/base. The second year also follows a similar sequence as 4/15 of the depreciable item/base is depreciated. This goes on until year 5 that include 1/15 of the depreciable item/base.

The above scenario aptly captures what accelerated depreciation is all about. The idea here is that an asset should be depreciated in same manner as it is been used. With this, an appropriate matching is established between an asset and its usage, and this is also critical in income taxes computation.