When a small business purchases fixed assets two financially based opposing forces come into play. The first is the financial reporting desire to present information in a fair manner so management can make good financial decisions. The opposing force has to do with taxation. Here the business desires to report less profit to reduce the tax obligation.
Modified Accelerated Cost Recovery System, also known as MACRS, is an Internal Revenue Service method of depreciation under the 1986 Tax Code. It is used to calculate depreciation for tax purposes at a similar rate to that used in business under the Double Declining Balance Method.
When it comes to depreciation, no two businesses are alike. Unlike traditional straight line depreciation where the asset value is costed out to depreciation expense in equal increments over a given life expectancy, accelerated depreciation expenses the cost at higher values during the earlier accounting periods and at a lower amount towards the last half of the asset’s life expectancy.