Accelerated Depreciation

Accelerated depreciation is a method of depreciating assets over a shorter period of time than the asset's useful life. This can be done to reduce the amount of taxes a company pays in the early years of an asset's life.

There are several different methods of accelerated depreciation, but the most common is the double-declining balance method. Under this method, the depreciation expense is calculated by multiplying the asset's depreciable basis by a declining balance factor. The declining balance factor is equal to 2 times the straight-line depreciation rate.

For example, if an asset has a depreciable basis of $100,000 and a useful life of 5 years, the straight-line depreciation rate would be 20% ($100,000 / 5 years). Under the double-declining balance method, the depreciation expense would be $20,000 in the first year ($100,000 x 20%). In the second year, the depreciation expense would be $16,000 ($20,000 x 80%). And so on.

Accelerated depreciation can be beneficial for companies that want to reduce their tax liability in the early years of an asset's life. However, it is important to note that accelerated depreciation can also result in higher taxes in the later years of an asset's life.

Companies should carefully consider the pros and cons of accelerated depreciation before using this method. They should also consult with their tax advisor to make sure that they are using the method correctly.

In addition to the double-declining balance method, there are several other methods of accelerated depreciation. These include the sum-of-the-years'-digits method, the declining-balance method, and the modified accelerated cost recovery system (MACRS).

The sum-of-the-years'-digits method is similar to the double-declining balance method, except that the declining balance factor is equal to the number of years remaining in the asset's useful life divided by the sum of the years' digits.

The declining-balance method is similar to the sum-of-the-years'-digits method, except that the declining balance factor is constant. The most common declining balance factor is 150%.

MACRS is a depreciation method that is used for tax purposes. It is based on the modified accelerated cost recovery system (MACRS) tables, which are published by the Internal Revenue Service (IRS).

The choice of depreciation method can have a significant impact on a company's taxes. Companies should carefully consider the different methods before choosing one.