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In this video I want to discuss the MACRS depreciation method which stands for modified accelerated cost recovery system and it's the current tax depreciation system in the United States and under this system the capitalized cost or the basis of the tangible property is recovered over a specified life by annual deductions for depreciation and the lives are specified broadly in the Internal Revenue Code what it does is it allows firms to recover the costs of capital equipment faster than the straight-line approach in a previous video I've discussed straight-line depreciation which is simply you deduct the same amount every year here you're going to deduct more in early years and less in later years one of the things that you should note that's different about MACRS versus the straight-line approach is the salvage value is not deducted when doing the calculations it seems to be a common mistake that is made when people do the depreciation schedule all right right here I'm going to show you an example of some of the property classes there are actually more but I couldn't squeeze them all into a slide that would be readable on the video okay there's three year property and some of the things that fall under three year property or special handling devices for food and beverage manufacturer special tools for the manufacturer of finished plastic products etc there's five year property information systems like computers and peripherals petroleum drilling equipment etc so the IRS specifies what table you should use for the depreciation so you don't make it up you don't decide okay I'm going to use you know five years for you know my other office furniture no they say that seven-year property so have to go with whatever they tell you you should be using this is what the table looks like okay again I've only shown you a few of them three or five years seven years but there are other depreciation schedules based on the asset class there are a few footnotes here three five seven and ten year classes use two hundred percent and the fifteen and twenty year classes use a hundred and fifty percent declining balance depreciation alright which is a depreciation method you may have covered in accounting class double declining balance and there again another accelerated depreciation approach they point out that all classes convert to straight-line depreciation in the optimal year shown with the asterisk so in for three-year equipment that's in year three for five years that's in year four for seven year that's in year five you'll notice that something odd is here we said this is three year depreciation but there are four years here and the reason for that is that they use a half year convention which means that the first year is it's assumed that you put the property into use on July first the middle of the year so you only get half a years depreciation there.