There are two different types of accounting: accrual and cash. Accrual accounting is the most popular of the two, as most businesses have both cash and non-cash transactions. One common non-cash transaction is depreciation. It is treated as a real expense that both reduces the value of the asset on the balance sheet and the "reported" net income. The IRS recommends MACRS (Modified Accelerated Cost Recovery System) as the depreciation methodology for exercise equipment; however, the best methodology for use is the one that fits the natural deterioration of the exercise equipment. This may be dependent on use, rather than years.

## Step 1.

Review depreciation definition. Depreciation is the value of the wear and tear on your equipment. Not only does it allow you to expense expensive equipment over the useful life of the asset (instead of all at once), but it helps manage the value of the asset on the balance sheet. "Straight-line" depreciation writes off an equal portion of the assets value every year, while other methods accelerate the expense in the beginning or at the end of the asset.

## Step 2.

Determine what's right for exercise equipment. The IRS is familiar with MACRS, so use MACRS unless you have a good reason not to.

## Step 3.

Review MACRS depreciation methodology. Look in IRS Tax Publication 946 under the section "Which Property Class Applies Under GDS?" in the introduction (See References). This will provide a recommendation for the useful life of your equipment, if you don't already have one.

## Step 4.

Walk through an example. Using MACRS and assuming your exercise equipment has a useful life of five years, let's compute the depreciation expense: We are going to use MACRS at the 200 percent double-declining balance rate. For a 10 year period MACRS yearly depreciation expenses are: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.761 percent for Years 1 through 5, respectively.

## Step 5.

Multiply the year by the rate to get the depreciation expense for that year. For instance, Year 1 depreciation expense for \$10,000 piece of exercise equipment is \$10,000 * .1 or \$1,000.