Accelerated Amortization – Definition

Cite this article as:"Accelerated Amortization – Definition," in The Business Professor, updated February 14, 2019, last accessed November 26, 2020, https://thebusinessprofessor.com/lesson/accelerated-amortization-definition/.

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What is Accelerated Amortization?

The recalculation of an amortization schedule after a borrower pays in advance is entitled accelerated amortization. Accelerated amortization often happens with mortgage payments. This amortizing method allows borrowers to pay off the loan at a higher than normal rate. These integers are arranged in official tables by the bank. The coefficients vary internationally.

A Little More on What is Accelerated Amortization

The common first step to accelerated amortization of a loan is y reducing the taxable base of the tax in the first years of a loan or, in essence,  making negative fiscal adjustments. Later, the borrower increases the taxable base of the tax or making a positive fiscal adjustment. This type accelerated amortization maintains the same taxes as if the loan had been paid off over the original terms. With this method, businesses can distribute the tax burden in a way that best benefits the company.

When Is Accelerated Amortization Relevant?

Because of recent tax regulations, there are varying cases in which accelerated depreciation can be applied. For fixed assets that are used for multiple work shifts, a higher coefficient can be applied. The caveat is that goods that are designed to be used continuously cannot utilize this tax break. Items that had previously been used prior to purchase can also benefit from higher coefficients.

Example of Accelerated Amortization

If a farmer were to buy a combine harvester with a value of one hundred fifty thousand dollars on January the first, the farmer could apply accelerated depreciation if it had been bought second hand.

References for Accelerated Amortization

  • https://www.investopedia.com/terms/a/accelerated-amortization.asp
  • Calculator: http://mortgage-x.com/calculators/extra_payment_calculator.asp

Academic Research on Accelerated Amortization

  • Accelerated Amortization, Growth, and Net Profits, Eisner, R. (1952). The Quarterly Journal of Economics, 66(4), 533-544. Eisner examines accelerated amortization through several case studies. The article outlines the schemes for accelerate amortization in both the United States of America and Great Britain. Eisner argues that a hybrid blend of styles would benefit business the most, using a model to illustrate the point.
  • A distributed lag investment function, Eisner, R. (1960). Econometrica, Journal of the Econometric Society, 1-29. Using historical data of lag investment functions, Eisner analyzes when businesses could benefit from acceleration coefficients. Eisner uses his case study to solidify Hick’s hypothesis of nonlinearity which argues that accelerator coefficients occur most often in business with a rapid increase in growth and sales.
  • Depreciation allowances, replacement requirements and growth, Eisner, R. (1952). The American Economic Review, 42(5), 820-831. Eisner analyzes the paradigm of depreciation allowances in the modern inflated economy. Eisner evaluates the idea that depreciation allowances cover the cost of original equipment, not the purchase of new equipment as it is designed. Eisner also examines the view that depreciation allowances serve as unfair tax evasion loopholes. Eisner concludes the article by presenting historical data on the subject to support his hypothesis.
  • The Pricing Effects of Accelerated Amortization, Miller, J. P. (1952). The Review of Economics and Statistics, 10-17. Miller examines accelerated amortization through an accounting lense. Miller uses case studies to hypothesize the effect of accelerated amortization has on final product pricing. The study analyzes the program as a way of strengthening economic powerhouses.
  • Accelerated amortization and industrial concentration, Selden, R. T. (1955). The Review of Economics and Statistics, 282-291. Selden analyzes the accelerated amortization program from a political-economic stance.  The study examines the number of businesses taking advantage of this tax break with the businesses conception date and its relation to the building of an economic defense in post-war America. The author then analyzes the effect this defense amortization has on industrial concentration.
  • What Should Commissions Regulating Public Utilities Do About Accelerated Tax Amortization?, Priest, A. J. G. (1953). Virginia Law Review, 579-606. The article examines the idea that consumers would reap the benefits from public utilities utilizing the accelerated tax amortization. Priest analyzes contemporary cases laid out to state commissioners from both sides of the issue.
  • Accelerated Depreciation: Some Further Thoughts, Eisner, R. (1955). The Quarterly Journal of Economics, 69(2), 285-296. Eisner examines the larger consequences of accelerated depreciation. Focusing on the annual increase in depreciation charges, the study analyzes the positive and negative ways in which this trend could affect whole economies.
  • Rate of return calculations as a measure of investment opportunities, Glanville, J. W. (1957). Journal of Petroleum Technology, 9(06), 12-15. Glanville discusses the importance of investment opportunities in crafting business dominance. The study examines various methods related to investment opportunities such as accelerated amortization. Focusing on diversification and capitalizing on investments, Glanville provides examples of when accelerated depreciation is most applicable.
  • The Effect of Accounting Conservatism on Corporate Investment Behavior, Ishida, S., & Ito, K. (2014). In International Perspectives on Accounting and Corporate Behavior (pp. 59-80). Springer, Tokyo. Ishida and Ito analyze the two main forms of conservatism affect the way in which corporations choose to invest. Because of societal expectations, conditional conservatism is preferred, though it restricts investments, by most investors. The adverse is true of unconditional conservatism.
  • Rate base methods and realized rates of return, Primeaux, W. J. (1978). Economic Inquiry, 16(1), 95-107. Primeaux opens the article with a synthesis of research surrounding the appropriate valuation of the rate base. Using historical utility earnings and adjusting for state regulations, the study compares rate bases. The study shows that neither regulations nor rapid inflation can cause a statistical difference in the earnings of utility firms.
  • Accelerated depreciation allowances as a stimulus to investment, Goode, R. (1955). The Quarterly Journal of Economics, 69(2), 191-220. Goode analyzes the differences between normal and accelerated depreciation allowances. The research shows the factors that influence accelerated depreciation and compare it with other tax breaks. Goode then makes the case for the use of accelerated depreciation as a stimulus for investment.
  • The case for accelerated depreciation, Domar, E. D. (1953). The case for accelerated depreciation. The Quarterly Journal of Economics, 67(4), 493-519. Domar outlines the instances in which accelerated depreciation works economically in favor of businesses borrowing money. Through a variety of case studies, Domar creates a guide for businesses to use for the implementation of accelerated depreciation.

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