Accelerated depreciation is a method of depreciation where an asset’s cost is counted towards depreciation expenses at a higher rate during the early years of its useful life. This allows companies to put up more costs for depreciation when the asset is new and likely to be more effective. By doing this, the companies can reduce taxable income earlier, leading to tax benefits.
Related Questions
1. How is the accelerated depreciation method different from the straight-line method?
In the straight-line method of depreciation, the asset’s value is depreciated equally over its productive life. In contrast, the accelerated depreciation method writes off the cost at a faster rate in the early years, reducing the depreciation amount in the later years of the asset’s life.
2. Can you give an example of an accelerated depreciation method?
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Sure, the Double Declining Balance (DDB) method is a famous example of the accelerated depreciation method. Here, the depreciation expense is double the straight-line depreciation rate.
3. What are the tax implications of accelerated depreciation?
Accelerated depreciation is desirable because it allows companies to depreciate assets more quickly, thereby reducing their current income tax liabilities due to lower taxable income.
4. When should a company use the accelerated depreciation method?
Companies that have assets that diminish in value quickly or become obsolete faster should consider using the accelerated depreciation method. This could include tech companies or those that use high-end machinery that could become obsolete quickly.
5. What are the disadvantages of using accelerated depreciation?
While there are tax benefits in the short term, in the long run, the benefits reduce as depreciation expenses decrease. Also, using this method may result in a lower reported net income in the initial years of an asset’s life.