Accelerated Depreciation: Definition, Advantages, And Disadvantages

What Is Accelerated Depreciation?

Accelerated depreciation is nothing but a depreciation method where the book value of the asset is deducted at a faster (accelerated) rate compared to that of the traditional straight-line method. In this method, higher deductions are made in the earlier year of the asset, which minimizes the taxable income.

Accelerated Depreciation For Business Explained:

In the United States, the internal revenue service (IRS) provides the deduction in the tax for the company in the cost of the asset it purchases. The inferences made here are commonly known as depreciation. It allows you (the business owner) to eliminate a percentage on the cost of your asset purchased each year, which you use for business purposes. The Government has given an option to speed up this process of depreciation in the way of accelerated depreciation. As mentioned earlier, this method lets you deduct a higher percentage of depreciation in exchange for the lower deductions in the future. While this method is very beneficial to the business owners, it has its own set of disadvantages as well.

For instance: ABC company purchases a piece of an asset for $ 1,000,000 with an average life expectancy of 10 years. With the straight-line method, depreciation calculation is one-tenth of the asset cost throughout ($ 1,000,000/10=$ 100,000). With an accelerated depreciation method, the expense might be more than the price of the asset in the initial years and the less expensive cost in future years.

Let us discuss this further in two groups, advantages, and disadvantages.

Advantages Of Accelerated Depreciation

1. Lower The Start-Up Cost

In the first year of the operation of the business, accelerated depreciation can reduce the price of a business start-up by increasing the percentage of deductions. It allows the business owner to lower the overall tax debt of the business, which gives you the opportunity of having money that is usable for marketing purposes, enhancing the company, or purchasing equipment. Eventually, by doing so, your chances of succeeding in the market increases.

2. Allows Deferral Of Tax-Debt

business can defer a portion of the tax debt as the system of accelerated depreciation creates higher deductions. When you want to reduce the taxes that you own presently, postponing the tax debt by use of an increased depreciation method will give you additional time apart from the time when you must pay taxes in full amount.

3. Lets You Take Higher Upfront Deductions

the significant advantage is that it allows you to deduct a more elevated amount immediately, and eventually, it helps you reduce your current tax bills. It is beneficial when the initial business stage might face issues with short-term cash flow. Increasing deductions now will let you avoid delayed deductions later when your business no longer exists.

Disadvantages Of Accelerated Depreciation

1. An Obstacle For Growing Business

Lower deduction in the future can pose a problem for growing the business. Here, accelerated depreciation increases only the identification of deductions and does not create high tax deductions with upfront deductions coming at the expense of lower future deductions. It can pose a problem to grow a business where the income generated moves to higher tax rates. Also, you will have very minimal options to reduce your taxes in the future with your business being in a higher tax bracket.

2. Known As A Clear Preference

the argument in opposition of accelerated depreciation states that it is a clear preference that permits a business to eliminate expenses earlier than actual wear down of the assets. It interferes with the business decision of how much, what, and when to invest. Besides, the present system is ridiculously outdated and unnecessarily complicated.

3. Risk Of Recaptured Depreciation

you decide to sell a long-term asset in this method, earlier than deemed worthless on its depreciation schedule. The profit you receive by selling more than its accounting value will be termed as recaptured depreciation. Here, the IRS will take the deductions back as the asset did not lose its value as expected, and your recaptured depreciation earned from profit will be taxed as the income gained.

Bottom Line

When you have to decide between the options of depreciation, you will now clearly know what the pros and cons of accelerated depreciation are.