Accelerated Depreciation - Explained
What is Accelerated Depreciation?
Written by J. Mance Gordon
Updated at April 17th, 2024
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What is Accelerated Depreciation?
Accelerated depreciation refers to any method of amortization/depreciation that produces higher depreciation deductions during the beginning years of a project.
How Does the Accelerated Depreciation Method Work?
For the fiscal and accounting terms, there is a method of discounting value or recognition of a decrease in numbers or size by the passing of time or by use, known as amortization or depreciation, which are two principles that are managed together. On the other hand, when discussing depreciation, it means to reduce the price, and it indicates the use of a tangible or fixed asset, which decreases in price, due to use and time.Deductions for depreciation can be taken for tax purposes. A property is depreciable if the following applies:
- It has nothing to do with investment property, merchandise in storage, or inventory.
- It must be maintained to generate income or used in business.
- It must be something that loses value, gets spent, becomes obsolete, runs out, or decays due to natural causes.
- It must have a definable useful life that is greater than one year.
Amortization is a term typically related to financial aspect but when referring to tax amortization, it is the same as depreciation. Amortization is only applicable to intangible or deferred assets, which include the purchase of brands, installation expenses, pre-operational expenses, and others.Accelerated depreciation is a system of depreciation that involves recovering the initial investment of deferred and fixed assets, using tax, by an increased percentage in the first few years following an acquisition. Through this method of depreciation, the cost of an asset is canceled quicker than based on the straight-line method. The financial advantage of this system is that depreciation is viewed as a cash flow added to the cash flows created by an investment project. Fiscally, the advantage of accelerated depreciation is that it reduces the taxes in the first few years of an assets life since depending on how high the depreciation charge is, the lower the real tax liability.