Question

A friend owns and operates her own business and is concerned about completing her tax return. She owns several assets and uses straight-line depreciation for business purposes. She intended to use straight-line depreciation for tax purposes also, but recently heard about another method called MACRS. She has asked for your advice on which method to use on her tax return. Write a memo recommending a depreciation method and explaining why you believe it should be used.

Answer 1

The depreciation is a method of apportioning the amount of funds to be kept for future capex and asset augmentation purpose. For this, both straightline and MACRS depreciation methods serve the purpose. However, MACRS method has got specific depreciation schedules as per the asset life and the type of the asset. It can also allow the owner of the asset to claim faster depreciation in the initial years of the operation of the asset and this can be used to offset some of the owed taxes and consequently can lead to better project outcomes and a higher Net Present Value for the projects.
Thus it is recommended that the owner opts for the accelerated depreciation and the MACRS schedule.