How do you calculate Modified Accelerated Cost Recovery System (MACRS) and Capital Cost Allowance (CCA) Depreciation?

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USA: Modified Accelerated Cost Recovery System (MACRS) Depreciation Calculations:

Depreciation Basis: We assume the "depreciation basis" is the Net Cost (after incentives) and we add back 50% of the federal tax credit (for simplicity, we add back 15% of gross cost). The cash you save (shown in Cash Flow chart) is this amount times your effective tax rate. So, if you depreciate $10,000 and have an income tax rate of 35%, you save $3,500 on your taxes.

The depreciation schedule used is: 20%, 32%, 19.2%, 11.52%, 11.52%, 5.76% in years 1 - 6 respectively.

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Again, the cash you save (on taxes) is the depreciated amount times your effective tax rate.

NOTES: We have also assumed the MACRS depreciation method described here applies to both federal and state tax returns. Some states may treat depreciation differently.

See: IRS form 4562 and Instructions for form 4562. Also see: IRS Pub. 946 - How to Depreciate Property

CANADA: Capital Cost Allowance (CCA) Depreciation - Class 43

Depreciation Basis: A 50% accelerated CCA is provided under Class 43.2 of Schedule II to the Income Tax Regulations for specified clean energy generation equipment. Eligible equipment includes solar thermal, solar air and solar photovoltaic equipment while project size restrictions have been eliminated. Eligible projects allow for accelerated capital cost write-offs, at 50 percent, on a declining balance basis. The first year allows 25% deduction in year 0 (1/2 year pro-rated). The amount depreciated is assumed to be the Gross Cost.

Again, the cash you save (on taxes) is the depreciated amount times your effective tax rate.

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