Tax laws generally grant depreciation rights only to the asset’s legal owner, who depreciates the cost of the asset over its economic life and claims any available investment tax credit. The cost of assets may be expensed for tax purposes using straight-line depreciation or, if permitted, accelerated depreciation.
| Single Investor Lease – Lease vs Loan Taxation | |
|---|---|
| Lease Taxable Income | Rent - Depreciation |
| Loan Taxable Income | (Interest + Principal) - Principal |
Under the tax code of the US Internal Revenue Service (IRS), the depreciation method, the annual amount of depreciation and the asset’s economic life depend on the type of asset (aircraft, manufactured equipment, real estate), the country where the asset is used or the lessee’s legal and tax residence. The modified accelerated cost recovery system (MACRS) is the cost recovery system used in the United States that permits the accelerated depreciation of the cost of depreciable tangible assets in order to calculate the depreciation expense for the assets. Under MACRS, assets are grouped and tax depreciated in terms of their specified depreciable lives (“recovery periods”) of 3-, 5-, 7-, 10-, 15- or 20-years. The assets in the 3-, 5-, 7-, and 10-year categories are depreciated using the 200% declining-balance method; for 15-and 20-year assets, the 150% declining-balance method must be used.
| MACRS vs Straight-Line Depreciation | ||||
|---|---|---|---|---|
| MARCS | Straight-Line | |||
| % | Amount | % | Amount | |
| 1 | 20.0 | $2,000 | 10 | $1,000 |
| 2 | 32.0 | $3,200 | 20 | $2,000 |
| 3 | 19.2 | $1,920 | 20 | $2,000 |
| 4 | 11.5 | $1,152 | 20 | $2,000 |
| 5 | 11.5 | $1,152 | 20 | $2,000 |
| 6 | 5.76 | $576 | 10 | $1,000 |
| Cost: $10,000; Useful Life: 5 years | ||||
In addition to the regular depreciation tax allowance available under MACRS, the IRS currently allows a bonus depreciation of 50% of the cost of qualifying assets – most types of tangible personal property and acquired computer software – in the year in which the asset is placed into service. Bonus depreciation can be used to create a tax loss.