What are the pros and cons of using MACRS vs straight-line depreciation for capital equipment sales?

1 What is MACRS depreciation?

MACRS stands for Modified Accelerated Cost Recovery System, and it's the default method of depreciation for most business assets in the US. It allows you to deduct a larger portion of the asset's cost in the early years of its useful life, and a smaller portion in the later years. This reduces your taxable income and increases your cash flow in the short term.

2 What is straight-line depreciation?

Straight-line depreciation is a simpler method that divides the asset's cost by its useful life and deducts the same amount every year. This results in a constant and predictable depreciation expense and taxable income over the asset's life.

3 Pros of MACRS depreciation

One of the main advantages of MACRS depreciation is that it can lower your tax liability and boost your cash flow in the first few years of owning the asset. This can help you recover your initial investment faster and free up funds for other purposes. Another benefit of MACRS depreciation is that it can match the actual decline in value of some assets that lose efficiency or functionality over time, such as machinery or vehicles.

4 Cons of MACRS depreciation

One of the main drawbacks of MACRS depreciation is that it can complicate your accounting and tax reporting, as you need to follow specific rules and tables for each asset class and recovery period. You also need to keep track of the asset's basis and depreciation allowance, and adjust them for any partial-year or mid-quarter conventions. Another disadvantage of MACRS depreciation is that it can increase your tax liability and reduce your cash flow in the later years of owning the asset, as you have less depreciation expense to offset your income.

5 Pros of straight-line depreciation

One of the main advantages of straight-line depreciation is that it is easy to calculate and apply, as you only need to know the asset's cost and useful life. You don't have to worry about different asset classes, recovery periods, conventions, or tables. Another benefit of straight-line depreciation is that it can provide a consistent and stable depreciation expense and taxable income over the asset's life, which can help you plan your budget and cash flow.

6 Cons of straight-line depreciation

One of the main disadvantages of straight-line depreciation is that it can overstate your tax liability and understate your cash flow in the early years of owning the asset, as you have a smaller depreciation expense than the actual decline in value of the asset. This can delay your break-even point and limit your reinvestment opportunities. Another drawback of straight-line depreciation is that it can understate your tax liability and overstate your cash flow in the later years of owning the asset, as you have a larger depreciation expense than the actual decline in value of the asset. This can inflate your income and expose you to higher taxes.