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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.
A Little More on What is Accelerated Depreciation Method
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 asset’s life since depending on how high the depreciation charge is, the lower the real tax liability.
References for Accelerated Depreciation
Academic Research on Accelerated Depreciation
Accelerated Depreciation: Tax Expenditure or Proper Allowance for Measuring Net Income?, Kahn, D. A. (1979). Michigan Law Review, 78(1), 1-58. The yearly depreciation allowance for an asset should not rely on the decrease in value of the asset throughout that year. Instead, depreciation should demonstrate the amount the taxpayer puts out for using the asset throughout that year. Allocating the actual cost is an adequate method of depreciation at least and is a more precise gauge of net income than straight-line depreciation. Accelerated depreciation is an appropriate way of allocating cost. Therefore, several of the current tax practices and laws should be wiped out or revised.
Accelerated depreciation and the allocation of income taxes, Davidson, S. (1958). Accounting Review, 173-180. The author discusses two articles that agree that the most critical of the area of controversy over inter-period allocation comes from using accelerated depreciation for tax reasons and straight-line depreciation for financial reporting.
The new economics of accelerated depreciation, Auerbach, A. J. (1982).This paper discusses the provisions of the new ways in which depreciable property is treated and assesses the economic impact. Particular attention is given to the part of the Accelerated Cost Recovery System that makes a safe harbor for a variety of sale-leaseback agreements, which completely allows the sale of depreciation reduction by investors who do not have taxable income.
The case for accelerated depreciation, Domar, E. D. (1953). The Quarterly Journal of Economics, 67(4), 493-519.
Accelerated Depreciation: A Proper Allowance for Measuring Net Income, Blum, W. J. (1979). Mich. L. Rev., 78, 1172. The author discusses how Kahn attempted to show that accelerated depreciation is an adequate allowance for determining net income that should not be categorized as a tax expenditure. The author goes on to say that Kahn’s defense of accelerated depreciation is presented in an engaging way. The author believes that most tax payment stuff is political wordiness and that the tax system is too hard in taxing income that comes from capital investments. The author believes that accelerated depreciation is in line with the neutrality concept for taxing income.
Accelerated depreciation allowances as a stimulus to investment, Goode, R. (1955). The Quarterly Journal of Economics, 69(2), 191-220.
Accounting standards and value relevance of financial statements: An international analysis, Hung, M. (2000). Journal of accounting and economics, 30(3), 401-420. This paper shows that accrual accounting has a negative impact on the value importance of income statements in countries where shareholder protection is weak as opposed to where shareholder protection is strong. The findings from the observations in 21 countries are in line with the assumption that the effectiveness of accrual accounting is improved by shareholder protection.
Economic depreciation and accelerated depreciation: An evaluation of the Conable-Jones 10-5-3 proposal, Hulten, C. R., & Wykoff, F. C. (1981). National Tax Journal, 45-60. This paper examines the Conable-Jones Proposal to accelerate tax depreciation allocations from the perspective of efficiency and equity. The authors compare and calculate the effective corporation tax rates dominating current law, economic depreciation, and under Conable-Jones. They find that the Conable-Jones proposal will negatively impact tax rates at low inflation rates, which suggests that a successful anti-inflation policy would cause the creation of a corporate tax method that is better for the taxpayer than straight investment expensing.
Introduction to” Accelerated Depreciation in the United States, 1954–60″, Sims, T. S. (1994). UCLA L. Rev., 42, 263. Speeding up economic growth has been a major issue for federal tax policy for much of the postwar period. Different views have been shared on the possibility of tax policy having an impact on the speed of the nation’s economic progress. Rapid growth involves allowances of a bigger portion of the economy’s resources to fixed capital formation. Making the rules more liberal regarding the determination of depreciation deductions for income tax purposes is considered by many to be one of the major measures of tax policy.
Accelerated Depreciation for Income Tax Purposes-A Study of the Decision and Some Firms Who Made It, Lindhe, R. (1963). Journal of Accounting Research, 139-148. The author begins by speaking on how a theoretical problem became a practical one for businessmen under the Internal Revenue Code of 1954. The revision lessened the strictness of permitting depreciation methods for income tax purposes. Before, the IRS needed to give consent to use any methods other than the straight line. The possible value of accelerated depreciation methods in taxation is the capacity to charge larger portions of the cost of an asset to earlier years of taxable life, much more than what could be charged with the straight line.
• Accelerated depreciation and the cost of capital, Södersten, J. (1982). The Scandinavian Journal of Economics, 84(1), 111-115. The postponement of corporation tax made possible by acceleration depreciation is compared by many to a party getting an interest-free loan from the Treasury. The deferral of corporation tax is viewed as a source of finance. One could interpret the effects of accelerated depreciation on cost so that it aligns with the innate view of deferred tax. Deferred corporate tax can be thought of as an alternative for debt or equity or both.