Through depreciation, tax filers spread the cost of investments across several years' returns. By dividing large purchases among different fiscal years, filers maximize the amount they can deduct from their tax liability. To depreciate an expense, you must estimate how many years the item will last and the item's worth, if any, once you've finished using it. The Internal Revenue Service's Modified Accelerated Cost Recovery System (MACRS) specifies each year's depreciation percentage rather than leaving the estimates and calculations to you.
1. Locate the item you are depreciating from Appendix B in IRS Publication 946. For example, if you are depreciating a computer, you will see computers listed under class 00.12, "Information Systems." Regardless of how long before you must next upgrade your computer, the IRS has assigned it a class life of six years, which corresponds with five recovery periods for depreciation.
2. Locate the table in Appendix A of the same publication that corresponds with the quarter of the year in which you began using the item. If you began using it in the first quarter, use table A-9. If you began using it in the second, use table A-10. If you began in the third or fourth quarter, use table A-11 or A-12 respectively.
3. Locate the column within the table that corresponds with your item's recovery periods. Continuing with the example from the previous step, choose the column for five recovery periods.
4. Locate the entry within the column for the year in which you are depreciating. For example, if you are looking at table A-10, having put the computer into service in May, and you want to depreciate the computer's cost in the third year of its life, you will see that the table lists 20 percent for year three.
5. Multiply the percentage from Step 4 by the price you paid for the item. If you paid $1,800 for the computer then calculate 0.20 × $1,800 = $360. This is the amount you must depreciate on the statement.
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