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Modified Accelerated Cost Recovery System

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Modified Accelerated Cost Recovery System

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Stands for MACRS

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Depreciation for tax purposes based on the tax reform act of 1986

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Does NOT measure the amount of deterioration or decline in the market value of the asset

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word problem example

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Uploaded by Delray Rowell on 2016-09-30.

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Look over key terms for chapter 17.

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Really how much does depreciation matter in daily life?

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Really how much does depreciation matter in daily life?

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Depends -- do you want wheels that are going to get you going, and keep going?

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Let's face it, there's no rosy spin one can put a car's depreciation. Whether new or used, all cars lose value. But used car buyers have some advantages and can fare well if they do their homework.

Here are five things to know about depreciation and buying used cars that will have you sitting pretty in the driver's seat.

1. Depreciation Starts The Moment You Drive Off The Lot

The minute a person drives a new car off the lot it loses approximately 10 percent of its value. By the end of the first year, that car will lose an additional 10 percent on average.

But this number is not fixed. Cars with less brand-name appeal and few options can be hit much harder, depreciating by as much as 50 percent in some cases. So when you buy a car that's less than two years old, be sure to know how much it has decreased in value.

Don't be fooled into thinking depreciation slows much after the first year. The fact is, new cars continue to lose value for four more years, averaging a decline of 15-25 percent per year. On average, a new car will lose 60 percent of its total value over the first five years of its life.

So yes, if you buy a fairly new used car you won't take that first-year hit, but you will take hits until the car reaches five years of age. Another way to look at it is: How much money can you save (and how much car can your purchase) by finding that sweet spot between a car's age and the number of miles it has on the odometer?

2. The Economics of Used-Car Depreciation

The fact that new cars lose 20 percent of their value the first year has been fairly constant over time. Your father could bank on it, and so can your daughter when she buys her first car. However, when a new car becomes a used car the dynamics of depreciation become a more complicated game. Just as with any commodity, used cars are affected by supply and demand.

At the turn of the millennium, for example, new cars were being rolled out at a rate that far exceeded demand, so leasing became popular. As leases lapsed, the used car market swelled, and with it the depreciation used car buyers faced. In other words, cars depreciated more quickly because the demand for used cars was low. Things leveled off for a while, but the recession of 2008 sent depreciation rates soaring once again.

Beyond market forces you can't control, psychology also has a role to play in how much your car's value drops year to year. Cars that are popular with the public fare much better than those deemed less desirable.

What's perceived as popular, of course, can shift from year to year, so there's a bit of a risk with any used car you buy. What may be deemed a hot used car this year may not be so hot the next if problems with the car emerge or if demand drops. Suddenly, that car that held its value well could begin to depreciate at a significantly faster rate.

So don't expect your used car to depreciate at a consistent level. A lot can change.

3. What To Look For In Your Used Car

Clearly, your car's value is subject to economic and market forces that you have little control over. However, there are other factor you can control.

Let's start with fuel economy. At the time of this writing, gas prices are reaching near-historic lows, but buyers haven't forgotten the pain of paying $4 per gallon. Additionally, and many of us have seen prices jump up and down in the past, so we know this period of cheap gasoline can't last forever. As a result, it makes sense to be mindful of fuel economy when you're car shopping.

The number of miles you drive will also factor in. The fewer miles on the car, the better your odds of trimming your depreciation. A good rule of thumb is 10,000 miles per year. That might seem like a strict limit if you have a long commute or live in an area where you have to drive everywhere you go, but the lower the mileage on the car, the more it's going to be worth.

Finally, consider a neutral color. If you're really worried about depreciation, think twice before you buy that used Charger in "Dukes of Hazard" orange. You may like it, but when it comes time to sell, you're going to significantly reduce the number of folks willing to buy it.

4. Keep It Clean

Imagine you're on a used car lot and you sit in a vehicle with frayed carpet, a cracked dashboard and dull mirrors. Chances are you're going to look elsewhere, and there's a good chance that other buyers will too.

The motor may purr, the tires may be in mint condition and the transmission could be in perfect working order, but buyers want to feel good about the car they drive. They'll also pay more for a car with a properly maintained interior. Using a little elbow grease, Armor All and Windex to keep your car clean can have a big impact on its value when it's time to sell.

5. Look for Cars that are Loaded with Features

It's not uncommon for new car buyers to skip a few options to keep the car's price low. However, it pays to look for cars with extra features if you're shopping for a used vehicle. In particular, you may want to keep your eyes peeled for cars that are equipped with optional safety features. You'll pay a bit more, but cars with strong safety features will hold their value better over the long haul.

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Let's face it, there's no rosy spin one can put a car's depreciation. Whether new or used, all cars lose value. But used car buyers have some advantages and can fare well if they do their homework. Here are five things to know about depreciation and buying used cars that will have you sitting pretty in the driver's seat.

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Deprortritization? Amorpriation? What's the diff? 

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Deprortritization? Amorpriation? What's the diff? 

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Amortization and depreciation | Finance & Capital Markets | Khan Academy

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Comparing depreciation and amortization. Created by Sal Khan. Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-financial-stateme/depreciation-amortization-tut/v/depreciation-in-cash-flow?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Finance and capital markets on Khan Academy: How do you account for things that get "used up" or a cost that should be spread over time. This tutorial has your answer.

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Turns out there's no difference.

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Do not confuse the insurance company's salvage value with residual value.

Jupiterimages/Photos.com/Getty Images

When you purchase an asset for your small business, you may need to depreciate it over a period of years rather than deduct the entire amount as an expense in the year of purchase. To determine how much depreciation to claim each year, you need to estimate how much you will receive when you sell the asset once its useful life is over. This amount is the asset's residual value, also known as its salvage value. Accountants make no distinction between the two terms.

Depreciation Basics

Depreciation allows you to recover the cost of the asset over the asset's useful life. The number on which you should base your annual depreciation is the asset's cost less its predicted salvage value divided by the asset's life in years. To illustrate, if the asset has a useful life of 10 years, a residual value of $2,000 and a cost of $12,000, the asset's depreciable basis would be $12,000 minus $2,000, or $10,000. Dividing $10,000 by 10 gives you $1,000, which is the amount you should claim for depreciation each year if you use the straight-line method. Assuming you paid cash for the asset, your accounting entry would consist of a debit of $12,000 to the asset category and a credit of $12,000 to cash.

Recording Depreciation

Each year, you would record your depreciation expense by debiting depreciation expense and crediting accumulated depreciation. The difference between the debit you originally posted to the asset category and the accumulated depreciation is the book value of the asset. Do not confuse the book value with the residual value. The two will not be the same. For example, after the first year's depreciation is posted, the asset you purchased for $12,000 will have a net book value of $11,000; after five years, the book value will be $7,000.

Gain or Loss on Asset

It is virtually impossible to predict exactly what an asset will sell for at any given point in time. If you receive more than you estimated, you may have to recognize a gain on the sale of the asset. If you receive less, you may recognize a loss on the asset. Suppose the asset you estimated would sell for $2,000 after 10 years actually sold for $3,000. You would debit accumulated depreciation for $10,000, debit cash for $3,000, credit your asset category for $12,000 and credit your gain on sale of asset account for $1,000. If, however, you only received $1,000 for the asset, you would debit cash for $1,000, debit accumulated depreciation for $10,000, credit your asset category for $12,000 and debit your loss on sale of asset account for $1,000.

Fully Depreciated Asset

It is possible for an asset to have no residual value. For example, if you use the modified accelerated recovery system, or MACRS, as your depreciation method, you do not assign a residual value. At the end of the asset's useful life, it will be fully depreciated. At that time, you would debit accumulated depreciation and credit the asset category for the entire amount of the expense. If you then sell the asset, record the revenue as a debit to cash and a credit to your gain on sale of asset account, regardless of whether you sold the asset as an operational item or for its scrap value.

About the Author

Jeffrey Joyner has had numerous articles published on the Internet covering a wide range of topics. He studied electrical engineering after a tour of duty in the military, then became a freelance computer programmer for several years before settling on a career as a writer.

Photo Credits

Jupiterimages/Photos.com/Getty Images

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The Difference Between Salvage Value and Residual Value

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When you purchase an asset for your small business, you may need to depreciate it over a period of years rather than deduct the entire amount as an expense in the year of purchase. To determine how much depreciation to claim each year, you need to estimate how much you will receive when you sell the asset once its useful life is over.

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1. Straight-line
2. Double or Accelerated declining
3. Units of Production
4. Sum of the Years' Digits
5. Modified Accelerated Cost Recovery System

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Publication 946 (2016), How To Depreciate Property | Internal Revenue Service

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This publication explains how you can recover the cost of business or income-producing property through deductions for depreciation (for example, the special depreciation allowance and deductions under the Modified Accelerated Cost Recovery System (MACRS)). It also explains how you can elect to take a section 179 deduction, instead of depreciation deductions, for certain property, and the additional rules for listed property.

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Depreciation is an accounting tool that shows how much a company spends on its business -- except instead of spending money, the business is "spending" buildings or vehicles.

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What is the purpose of depreciation? | AccountingCoach

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The purpose of depreciation is to match the cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset. Since it is hard to see a direct link to revenues, the asset's cost is usually allocated to (assigned to, spread over) the years in whic...

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How to do Units of Production Depreciation

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Uploaded by The Accounting Workbook on 2015-10-13.

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Units-of-production

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the company determines the asset’s depreciation according to how much the company uses the asset

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Straight-line How-to

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Straight Line Method for IB Business (3.5). For more information please see dpbusinessmanagement.com

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Partial Year

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Straight-line Example

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It tries to distribute the same amount of expense to each period of time