Depreciation Calculated Accurately?

12 minute read time.

Is MACRS Depreciation Accurately Calculated for Personal Property in Sage Fixed Assets—Depreciation?

 

By Bob McElroy, Certified Trainer, Sage University 

“I hold in my hand 1,379 pages of tax simplification.” -- former Rep Delbert Latta, (R, OH), from a debate on the House floor, 1985.

“Controlling complexity is the essence of computer programming.” -- Brian Kernighan, former Bell Labs computer scientist, creator of AWK.

I was teaching a seminar in Atlanta not long ago, and one of my students who managed the fixed asset accounting at a Georgia bank shared an interesting story in class. During her last audit, she explained, the auditor asked her, “How do you know the Sage program accurately calculates depreciation?”

“Hmmm; I wonder why he asked you that?” I wondered aloud. My student didn’t know why the auditor had asked this question. Moreover, she didn’t really know how to answer his question with confidence.

Coincidentally, I heard this same question of whether the Sage program accurately calculates depreciation arise again just a few days later. In this case, I working with the accounting staff at a client’s office (what we call an “onsite”) at their location in Texas.

In a very definitive tone, the comptroller and her subordinates told me that the Sage program did not calculate depreciation expense correctly in the Tax book. How did she arrive at that conclusion? Their auditor had told them that the Sage calculations were flawed and therefore had to be adjusted with percentage values taken from IRS tables.[1]

Because of these 2 recent events[2], I have written this paper. The purpose here is to manually calculate depreciation expense following the instructions published by the IRS, and then to compare the calculations with those produced by the Sage Fixed Assets—Depreciation program for the same asset.

To begin with, here is the 15-step method as delineated in the IRS worksheet intended to be used by the taxpayer in order to calculate depreciation expense:

Part I

1.

MACRS System: GDS or ADS

 

2.

Property class

 

3.

Date placed in service

 

4.

Recovery period

 

5.

Method and convention

 

6.

Depreciation rate (from tables)

 

Part II

7.

Cost or other basis

 

8.

Business/investment use (percent)

 

9.

Multiply line 7 by line 8

 

10.

Total claimed for section 179 deduction and other items

 

11.

Subtract line 10 from line 9. This is your tentative basis for depreciation

 

12.

Multiply line 11 by .50 if the 50% special depreciation allowance

 

13.

Subtract line 12 from line 11. This is your basis for depreciation

 

14.

Depreciation rate (from line 6)

 

15.

Multiply line 13 by line 14. This is your MACRS depreciation deduction

 

 

And here below is an example from the IRS Publication 946, pages 41-42, published Feb 18, 2016. This example is for unlisted personal property[3] placed in service in 2015, with a 7-year recovery period and no expense taken in the first year from either Section 179 or Section 168 (bonus depreciation).

 And continuing to follow the example in the IRS publication, the text sets forth the depreciation for the remainder of its life as shown below:


Of course, the resulting data is only as good as the data inputs into the algorithm. The percentage figures come from IRS tables, and therefore, one must use the correct percentage factors derived from the correct table. Here below is an extract of the IRS table from which the numbers in the example above were taken. I’ve highlighted the factors that were used in this particular working illustration.

 

Let’s compare now the depreciation of this sample asset, used as an example in the IRS publication, with the expense figures calculated from the Sage Fixed Assets—Depreciation program.

Year

Depreciation of Sample Asset as Calculated Manually from the IRS Table

Depreciation of Sample Asset as Calculated from the Sage Fixed Assets—Depreciation Program

2015

$1,429

$1,428.57

2016

$2,449

$2,448.98

2017

$1,749

$1,749.27

2018

$1,249

$1,249.48

2019

$893

$892.49

2020

$892

$892.48

2021

$893

$892.49

2022

$446

$446.24

Total

$10,000.00

$10,000.00

Note that the numbers are not the same, at least, not to the penny. That’s because the default depreciation method of MF200 was used in the Sage program. This is the MACRS Formula method which is more precise than the rounding produced when using the IRS tables. And because it’s more precise, the formula method is approved by the IRS to calculate depreciation expense. At the discretion of the fixed asset manager, however, one can elect to use the MT200 in the Sage program in lieu of the MF200. The MT200 is the MACRS Table method.[4] Use this method, and the Sage program will produce the very same IRS numbers as shown in the left hand side of the table above.

But is the Sage program just as accurate when a first-year expense is taken on assets either under Section 179 or 168 (bonus depreciation)? Let’s test it and see. In this illustration, we’ll take the same example above, but assume a bonus depreciation of 50% in its first year.   To begin, we’ll use the IRS worksheet and work up the depreciation manually for its first year.

Part I

1.

MACRS System: GDS or ADS

GDS

2.

Property class

7-year

3.

Date placed in service

8/11/2015

4.

Recovery period

7 years

5.

Method and convention

200% DB; Half-year

6.

Depreciation rate (from tables)

0.1429

Part II

7.

Cost or other basis

$10,000

8.

Business/investment use (percent)

100%

9.

Multiply line 7 by line 8

$10,000

10.

Total claimed for section 179 deduction and other items

-0-

11.

Subtract line 10 from line 9. This is your tentative basis for depreciation

$10,000

12.

Multiply line 11 by .50 if the 50% special depreciation allowance

$5,000

13.

Subtract line 12 from line 11. This is your basis for depreciation

$5,000

14.

Depreciation rate (from line 6)

0.1429

15.

Multiply line 13 by line 14. This is your MACRS depreciation deduction

$714.50

 

Next, we’ll construct a table and manually calculate the depreciation using the percentage factors as set forth in the IRS Tables for each year of the asset’s useful life:

A

B

C

D

Year

Basis

% Factor from IRS Table

Depreciation (B X C)

2015

$5,000

0.1429

$714.50

2016

$5,000

0.2449

$1,224.50

2017

$5,000

0.1749

$874.50

2018

$5,000

0.1249

$624.50

2019

$5,000

0.0893

$446.50

2020

$5,000

0.0892

$446.00

2021

$5,000

0.0893

$446.50

2022

$5,000

0.0446

$223.00

Total

 

 

$5,000.00

Finally, let’s compare these numbers with the projected depreciation from the Sage Fixed Assets—Depreciation program.

Year

Depreciation of Sample Asset as Calculated Manually from the IRS Table

Depreciation of Sample Asset as Calculated from the Sage Fixed Assets—Depreciation Program

2015

$714.50*

$714.29*

2016

$1,224.50

$1,224.49

2017

$874.50

$874.64

2018

$624.50

$624.74

2019

$446.50

$446.24

2020

$446.00

$446.24

2021

$446.50

$446.24

2022

$223.00

$223.12

Total

$5,000.00*

$5,000.00*

*Figure does not include the $5,000 bonus depreciation which would be added to the depreciation calculated in the first year, i.e., 2015 in this example.

Conclusion

The Sage Fixed Assets—Depreciation program can be relied upon for its accuracy of the depreciation figures calculated. Consider instead the likelihood of committing human error when manually calculating the depreciation expense from the IRS Tables. The likelihood of producing inaccurate depreciate expense figures is greater when not using software tools such as the Sage Fixed Assets—Depreciation program. After all, this Sage program was designed to ameliorate the effort to apply our Byzantine tax law and still produce results upon which we can rely.



[1] The MT method is the original IRS method established when the Tax Reform Act of 1986 was enacted into law.

[2] The IRS has published a similar but slightly different worksheet to use when calculating depreciation on listed personal property where limits are required such as a passenger automobile or light truck or van.

[3] Although her auditor is one of the Big Four, I won’t name the firm because I was hearing the report second-hand, and it’s a possibility that there may have been a miscommunication or misunderstanding.

[4] Additionally, I have also read questions posted on the Sage City Forum earlier this year challenging the accuracy of how the Sage software calculated depreciation in the Tax book.