Referring to the MACRS depreciation table provided by the IRS, an asset group under the 5 year life class, enjoys depreciation of 20 percent in the first year, 32 percent in the second year, 19.2 percent in the third year, 11.52 percent in the fourth year, and 5.76 percent in the fifth year. Using the straight-line depreciation method, in contrast, means a flat 20 percent deprecation in each of the five years.
For example, the straight-line depreciation of an asset in the 5-year life class asset is 20 percent. Since MACRS depreciation allows a double rate for 5-year life classes, the depreciation rate for the first year is 40 percent. Since MACRS depreciation also stipulates considering the purchase date of the asset at the middle of the financial year, regardless of the actual purchase, effective depreciation allowable for the first year is half of this 40 percent, or 20 percent.
In the second year, the asset enjoys a depreciation of 32 percent instead of the 20 percent allowed by the straight-line method of deprecation. With 20 percent depreciated during the first year, 40 percent of the remaining 80 percent, translates to 32 percent.
Similarly, 40 percent of the remaining 48 percent (100-20-32) being 19.2 percent, the allowable depreciation in the third year is 19.2 percent.
In the fourth year, 40 percent of the remaining value of 27.8 percent (100-20-32-19.8) being 11.52, the claimable depreciation is 11.52 percent of the asset value.
In the last year, the claimable depreciation is 5.76 percent, or the balance value of the asset. 100-20-32-19.8-11.52 = 5.76 percent.
Using the MACRS depreciation allows writing off the entire value of the asset within the life of the asset. The revenue that accrues from the disposition of the asset, is then treated as fresh income.