Let's take a look at the distinctions between Straight-Line Depreciation and the Modified Accelerated Cost Recovery System (MACRS).
- MACRS is frequently chosen for tax advantages, while Straight-Line is utilized for financial consistency and simplicity.
- MACRS can have an impact on financial statements by causing higher expenses in the early years and lower taxable income, while Straight-Line ensures consistent expense allocation.
- The IRS regulates MACRS, but Straight-Line allows for more flexibility in estimating useful life and salvage value.
To demonstrate the difference between methods, here is an illustration:
The use of MACRS depreciation (accelerating the depreciation deduction) rather than straight-line depreciation is an example of what tax planning technique?
The three primary and common types of tax planning are:
- When income is recognized,
- Transferring income between taxpayers and jurisdictions, and
- Converting income between high and low-rate activities.
By using the timing technique, income and/or deductions can be recognized more quickly or delayed. Decreasing or deferring the depreciation deduction is a timing strategy when choosing depreciation methods.
