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Allocation of the cost of fixed assets, such as plant and building, over the life of the asset. Depreciation is due to physical use and/or obsolescence. Depreciation reduces taxable income, but does not reduce cash. The two depreciation methods allowable on the tax return are straight-line and modified accelerated cost recovery system (MACRS). Under the straight-line method, depreciation is the same amount each year. Under MACRS, each item of property is assigned to a property class. The property class establishes the depreciation time period.