What is the impact of calculating depreciation using MACRS for federal income tax?

Calculating depreciation using the Modified Accelerated Cost Recovery System (MACRS) has a significant impact on federal income taxes by reducing taxable income. MACRS allows businesses to recover the cost of an asset over a specified life span, typically resulting in larger depreciation deductions in the earlier years of an asset's life. This accelerated depreciation means a business can deduct more in expenses sooner, which lowers the taxable income for those years.

As a result, this reduction in taxable income can lead to a decrease in the amount of federal income tax that the business is required to pay during the early years after acquiring an asset. This tax benefit can improve cash flow and provide more resources for reinvestment in the business, making MACRS a favored choice for many companies seeking tax efficiency.

The other options do not reflect the effect of using MACRS accurately. It does not increase book value, as depreciation reduces asset values on the balance sheet. Although it might seem to increase complexity in tax returns, the primary focus of MACRS is its direct benefit to reducing taxable income.

In summary, utilizing MACRS for depreciation purposes plays a crucial role in managing taxable income and tax liabilities effectively.