Income Tax Depreciation

You may hear your accountant mention MACRS, (Modified Accelerated Cost Recovery System) ACRS (Accelerated Cost Recovery System), or Section 179. Each of these is an accelerated depreciation method set forth by income tax law. The method used depends in part upon the type of property and the year that it was placed in service.

Income tax rules are not guided by the accounting concepts that apply to depreciation for financial reporting. Hence, MACRS, ACRS, and Section 179 are not acceptable under GAAP (generally accepted accounting principles). The IRS's greatly accelerated depreciation methods do not accurately match costs to revenues. However, they allow you to take larger tax deductions in the early years of asset ownership.

Section 179 is of particular relevance to small businesses. It allows a deduction for the entire cost of a fixed asset in the year of acquisition. This can amount to a significant savings in the up-front cost of a fixed asset purchase. Certain limitations apply.

While IRS methods cannot be used for book depreciation, the book methods described in this Decision Tool are acceptable for tax use. However, only an accountant can tell you which method will provide the most tax benefit. Use Intuit's TurboTax or see your tax advisor for income tax depreciation rules and calculations.