Question

Year two in each of the MACRS depreciation schedules: O is the only, year in which MACRS depreciation is greater than straight line depreciation O is the year in which taxes are more under MAORS than under straight line. o is the point at which depreciation becomes unimportant to a company O is superior to straight line because of the time value of money o None of the above is true.

Answer 1

MACRS is a policy that accelerates cost recovery benefits. It allows a taxpayer to take large tax deduction in the early years of the asset's life. MACRS accelerates the cost recovery (depreciation) of an asset but results in the same net depreciation as you would receive under straight-line depreciation.

Year 2 in each of the MACRS depreciation schedules is the year in which the taxes are more under MACRS than under a straight line.

This is a MACRS schedule,

Recovery Year	3-Year	5-Year	7-Year	10-Year
1	33.33	20	14.29	10
2	44.45	32	24.49	18
3	14.81	19.2	17.49	14.4
4	7.41	11.52	12.49	11.52
5		11.52	8.93	9.22
6		5.76	8.92	7.37
7			8.93	6.55
8			4.46	6.55
9				6.56
10				6.55
11				3.28

Under the straight line, the depreciation is equal every year.

Under MACRS, A half-year depreciation is allowed in the first and last recovery years.

As we can observe from the table, the 2nd yr depreciation in every MACRS schedule is more than the depreciation in an otherwise straight-line depreciation schedule.

Straight-line depreciation for 3 yr will be 33% every yr, for 5yr it will be 20% every yr, for 10yr it will be 10% every yr. In each of the cases, MACRS 2nd yr dep will be more than straight-line depreciation.

Hence, Year 2 in each of the MACRS depreciation schedules is the year in which the taxes are more under MACRS than under a straight line.

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