Assets & Equipment Glossary
Plain-English definitions of 11 key asset and depreciation terms — from MACRS and Section 179 to book value, accumulated depreciation, and amortization.
MACRS (Modified Accelerated Cost Recovery System)
The IRS's standard depreciation system. Every business asset is assigned to a recovery period class (5-year, 7-year, 15-year, etc.) that determines how the cost is spread across annual deductions. Uses a front-loaded declining balance method that switches to straight-line when beneficial.
Section 179 Expensing
An IRS election that lets businesses deduct the full cost of qualifying property in the year of purchase, up to an annual limit ($1,220,000 for 2024). Deduction cannot exceed business taxable income, it cannot create a loss. California's Section 179 limit is much lower ($25,000), which creates a difference between federal and California taxable income that your NCO advisor reconciles at tax time.
Bonus Depreciation
A federal provision allowing immediate expensing of a percentage of qualifying property in the year of purchase (60% for 2024, phasing down to 0% by 2027). Unlike Section 179, bonus depreciation can create a business loss. California does not conform, California requires standard MACRS, with no bonus percentage.
Recovery Period
The number of years over which an asset is depreciated under MACRS. Determined by the type of asset: 5 years for computers and certain equipment, 7 years for office furniture and most machinery, 27.5 years for residential rental property, 39 years for commercial real estate.
Depreciation
The accounting and tax process of gradually reducing an asset's value over its useful life. Matches the cost of an asset to the periods in which it generates revenue. For federal tax purposes, governed by MACRS. For book (accounting) purposes, your NCO bookkeeper records depreciation periodically, usually at year-end.
Book Value (Net Book Value)
An asset's original cost minus the accumulated depreciation recorded against it. Represents what the asset is worth on the Balance Sheet, not necessarily its market value. An asset with a book value of zero may still have real-world utility.
Accumulated Depreciation
The total depreciation expense recorded against an asset since it was placed in service. Appears as a contra-asset account on the Balance Sheet, reducing the gross asset value to net book value.
Fixed Asset
A long-term tangible asset used in the business for more than one year, equipment, vehicles, computers, furniture, buildings. Also called property, plant and equipment (PP&E) or capital assets.
Current Asset
A short-term asset expected to be converted to cash or used within 12 months. Examples: cash, accounts receivable, inventory, prepaid expenses.
Tangible vs. Intangible Asset
Tangible assets are physical, equipment, vehicles, buildings. Intangible assets are non-physical, patents, trademarks, goodwill, software licenses. Both can be depreciated (or amortized), but the rules and timelines differ.
Amortization
The gradual write-down of an intangible asset's value over its useful life. Conceptually identical to depreciation, but applied to non-physical assets like patents, customer lists, and non-compete agreements. Also used to describe the reduction of a loan balance over time through regular payments.