Accelerated Depreciation Definition
As businesses buy assets, such as land or heavy equipment, they depreciate them in their financial statements. Businesses could record the entire asset expense in one payment, but this enormous expense would unbalance the apparent profit of the business, so depreciation methods are used. Standard depreciation slowly adds up expenses throughout the life of the product to equal the ultimate expense. This is too slow for some assets, so accelerated depreciation is often used instead.
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Definition
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Accelerated depreciation is a type of depreciation used to record asset expenses in stages, but this method records the entire expense within only a few years instead of throughout the life of the asset. This allows the company to quickly record the entire expense and not draw it out any longer.
Uses
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Accelerated depreciation helps a company show more long-term profits, by focusing expenses on the short term. The faster an asset is recorded as being fully paid, the more profit the financial statements will display after that. Companies that are doing well in present years but are uncertain about coming years can use accelerated depreciation to promptly record expenses, bolstering future income reports.
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MACRS
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MACRS, for Modified Accelerated Cost Recovery System, is the most common accelerated depreciation structure used by businesses. MACRS divides assets into categories based on the type of asset and its cost. Each category has a schedule lasting anywhere from three to 20 years, with a different percentage of the total expense assigned to each year.
Benefits
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When used correctly, businesses can receive tax benefits by using accelerated depreciation. Because accelerated schedules focus most expenses in the beginning years of the asset, the business incurs larger expenses then. However, these larger expenses often provide the business with tax benefits and greater deductions, saving more tax money than other methods would.
Considerations
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Accelerated depreciation gives the business a lot of short-term expense. Recording this expense lowers income, at least on paper, and a low income can make it very difficult for a business to attract investors or receive approval for loans.
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References
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