What is Accelerated Depreciation and Why do Businesses Prefer it?

Posted In | Finance | Accounting Software

What is Accelerated Depreciation?    

Accelerated depreciation is a method of depreciation in which larger depreciation deductions are taken in the early years of an asset's life, and smaller deductions are taken in later years.

 

 

 

Types of Accelerated Depreciation Methods    

There are four types of accelerated depreciation methods:
1. The straight-line method
2. The declining balance method
3. The sum-of-the-years'-digits method
4. The double declining balance method

 

The most commonly used methods are the declining balance method and the sum-of-the-years digits (SYD) method.

• Declining Balance Method

The declining balance method is a depreciation method that uses a constant rate of depreciation. The rate is applied to the undepreciated balance of the asset. The rate is applied to the undepreciated balance of the asset. 

• Sum-of-the-Years Digits (SYD) Method

The sum-of-the-years’-digits method is a depreciation method that uses a declining rate of depreciation. The rate is applied to the undepreciated balance of the asset. The rate is applied to the undepreciated balance of the asset. 

 

Can you Take Accelerated Depreciation?    

Yes, you can take accelerated depreciation on most business assets. This means you can claim a larger deduction in the first year the asset is placed in service. To qualify for accelerated depreciation, the asset must be new and have a useful life of 20 years or less. Accelerated depreciation is not available for certain assets, such as land or inventory.

 

Why is Accelerated Depreciation Good?    

There are a few reasons why accelerated depreciation is good. First, it allows businesses to write off the cost of new assets more quickly, which can improve cash flow. Second, it can incentivize businesses to invest in new capital equipment and machinery, which can boost productivity. Finally, it can create jobs and spur economic growth.

One potential downside of accelerated depreciation is that it can reduce the value of a business's tax deductions in future years.

 

Can you Accelerate Depreciation Under GAAP?    

Yes, accelerated depreciation is allowed under GAAP. There are a number of reasons why a company might choose to accelerate its depreciation deductions. For example, a company might want to take advantage of current tax laws that allow for larger deductions in the early years of an asset’s life. Or a company might want to match its depreciation deductions to its expected pattern of revenue from the use of the asset.

 

What Properties Qualify for Accelerated Depreciation?    

Accelerated depreciation is available for property that is used in a business, that has a useful life of 20 years or less, and that is depreciated using the Modified Accelerated Cost Recovery System (MACRS). 
Examples of property that qualifies for accelerated depreciation include:

• Machinery
• Equipment
• Furniture
• Computers
• Office buildings
• Warehouses 

Note: Accelerated depreciation is not available for land or for the property that is used for personal, rather than business purposes.

 

How does Accelerated Depreciation Affect Taxes?    

Accelerated depreciation affects taxes by allowing businesses to deduct a larger portion of the cost of an asset in the early years of ownership. This results in a lower tax bill in the short term but may result in a higher tax bill in the long term when the asset is sold. Some businesses use accelerated depreciation for tax planning purposes to minimize their tax liability in the short term. This can be a risky strategy, however, as it can result in a larger tax bill in the long term if the asset is sold for less than its original purchase price.