What is accelerated depreciation

The use of accelerated depreciation is a fairly common technique to provide faster tax credits on assets. It allows the owner to make more profit for the reimbursement of certain milestones.

The principle of accelerated depreciation

The idea of depreciation on the money accounting of depreciation of capital over time and migration to the production as production costs. This may reduce the income of the company. Depreciation takes into account the reduction in the cost of equipment and allows companies to calculate the objective price of products of trade. This amount is included in tax expenses for the current calendar year. The use of a particular form of depreciation is based on finding ways to reduce the tax burden on businesses.

Accelerated depreciation is depreciation at inflated rates, but the increase in rules allowed no more than two times. That is, a large part of the cost of fixed assets is written off on expenses in the first years of operation of fixed assets, allowing you to reduce tax deductions at a profit. This means that the owner will not use the mechanism of direct depreciation. Also, it would mean that in subsequent years, the owner will not be able to claim depreciation of the assets. However, the cumulative impact on using the increased amount as a tax shield in the year or two actually can be a very good way for the company to stay afloat in the short term. Accelerated depreciation is not accrued: on fixed assets with a service life of less than three years; for the rolling stock of automobile transport, as they wear calculated on the basis of mileage; unique equipment.

The advantages of accelerated depreciation

For example, the company buys a new delivery van. The first year, the company will be able to do a standard amortization of cost through tax deductions. The alternative to this is to use the accelerated deductions and the use of the most part, allowed depreciation of capital over the next few years. The negative side of this system would be that the cost of the van will be generated by tax deductions in subsequent years. The end result is that the company gets a good tax exemption and a new van, during one tax year. Accelerated depreciation gives you the opportunity to increase their domestic investments, which consist of net income and of deductions for depreciation. At the same time depreciation of investments (contributions) are always available and are at the disposal of the enterprise, and have no value, as it were "free" for the company.

Disadvantages of accelerated depreciation

Care should be taken when using the principle of accelerated depreciation. At first glance, the concept may seem a very attractive way to get the maximum profit from the property and assets the first time. However, there is a certain probability that its use will lead to financial problems in subsequent years. Before you make a decision to use accelerated depreciation in order to receive a tax cut, it's a good idea to check and other possible solutions to the problem.

In some cases, the use of this technique companies brings more problems than good. Advice from financial analysts or accounting firm will help clarify whether the use of accelerated depreciation the best out of the situation.