Asked by Christian Broussard on Jun 08, 2024
Verified
The Modified Accelerated Cost Recovery System (MACRS) is often used by companies to calculate depreciation expense for tax purposes. Which of the following is most correct?
A) MACRS allows greater tax deductions related to depreciation earlier in the life of an asset than straight line depreciation does.
B) MACRS uses the half-year convention in calculating depreciation expense.
C) MACRS always depreciates the value of an asset down to zero (as opposed to a salvage value) if the asset is held long enough by the company.
D) Even though depreciation is a non-cash expense, the use of MACRS can improve the profitability of a project as compared to the same project using straight line depreciation.
E) All of the above are correct.
Modified Accelerated Cost Recovery System (MACRS)
A method of depreciation used for tax purposes in the United States that allows businesses to recover investments in certain property over a specified life through annual deductions.
Tax Deductions
Expenses that can be subtracted from gross income to reduce taxable income and overall tax liability.
Half-Year Convention
The half-year convention is a tax and accounting principle that allows for depreciation of assets to be calculated as if they had been in service for half a year, regardless of when they were actually acquired during the fiscal year.
- Understand and apply depreciation methods including Modified Accelerated Cost Recovery System (MACRS) for tax purposes.
Verified Answer
RM
Roger MikhailJun 11, 2024
Final Answer :
E
Explanation :
A) MACRS uses an accelerated method of depreciation where a higher percentage of the value of an asset is depreciated earlier in its life. This results in greater tax deductions in the earlier years of the asset's life compared to straight line depreciation.
B) MACRS uses the half-year convention which assumes that an asset is purchased in the middle of the year and only allows for half a year's worth of depreciation in the first year.
C) MACRS does not always depreciate the value of an asset down to zero, as there is an option to use a salvage value if the company expects to sell the asset at the end of its useful life.
D) Even though depreciation is a non-cash expense, the use of MACRS can improve the profitability of a project as it reduces a company's taxable income and therefore lowers its tax liability. This can result in greater cash flows and ultimately improve the profitability of the project.
Therefore, all of the above statements are correct.
B) MACRS uses the half-year convention which assumes that an asset is purchased in the middle of the year and only allows for half a year's worth of depreciation in the first year.
C) MACRS does not always depreciate the value of an asset down to zero, as there is an option to use a salvage value if the company expects to sell the asset at the end of its useful life.
D) Even though depreciation is a non-cash expense, the use of MACRS can improve the profitability of a project as it reduces a company's taxable income and therefore lowers its tax liability. This can result in greater cash flows and ultimately improve the profitability of the project.
Therefore, all of the above statements are correct.
Learning Objectives
- Understand and apply depreciation methods including Modified Accelerated Cost Recovery System (MACRS) for tax purposes.