Definition of "MACRS Depreciation"
Depreciation is very important to business owners and others who possess expensive assets they use for making profit. Assets are depreciated over their useful lifetime so that owners do not have to account for the total expense of the item when it is bought, only as it is used. This softens some of the tax and business value problems that would otherwise occur. Many different types of depreciation exist, but one of the most common for businesses in the United States is known as MACRS.
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Definition
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MACRS stands for modified accelerated cost recovery system, based on a depreciation system that was changed during the 1980s. MACRS is one of the depreciation methods allowed by the IRS, and accountants use the method depending on how much money the business can save and how profitable it needs to appear. No end salvage value is calculated using MACRS--the system depreciates items down to zero, based on yearly schedules.
Requirements
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To use MACRS, the business must have a tangible asset. This is an asset that has a value that is based on physical properties, such as a copy machine, truck, computer, or furniture. Buildings and land can also be tangible assets.
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Process
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MARCS divides assets into categories based on their type. Each category has an accelerated depreciation schedule that depreciates the item in only a few years, instead of for its entire useful life, allowing the company to keep using the asset without accounting for its expense. Some items under MACRS use a three-year system, in which depreciation is carried out over four years (the fourth year the item cost reaches zero). Other categories have different numbers of years and different percentages of value that are calculated per year.
Benefits
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Correctly used, MACRS allows a company to pay off an asset quickly. Of course, the item was already paid for when the business bought it, but it is only accounted as an expense over a period of time. MACRS is designed to hurry that time period and show on the books that the business has paid it off over only a few years (up to 20). If a company has enough funds to show that the asset is paid off largely in its first few years of use while still maintaining the appearance of healthy profits, MACRS allows the business to absorb the cost and move on, saving profit in the future.
Considerations
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MACRS is not always beneficial, especially for small firms that cannot afford the profit hits more successful companies may be able to take. Although they can afford the item, they may not be able to afford showing most of its price as an expense on their books, which can quickly overwhelm small profits. Instead, they may want to choose a longer depreciation strategy that carries the expense more evenly through the life of the asset.
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References
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