What Is Accelerated Depreciation?

Businesses depreciate assets.

Accelerated depreciation is an accounting method that depreciates a company's fixed assets at a higher amount in the earlier years of the asset. The two most popular methods of accelerated depreciation are the declining balance method and the sum-of-the-years' digits method.

Determination

You must determine the useful life of the asset to depreciate it. Search Section 168(e)(3) of the United States Tax Code to determine your asset's useful life (see Resources).

Example

Your company buys a truck that costs $7,000 that is expected to last for seven years. With straight-line depreciation, the company might allocate $1,000 of the cost of the truck to its expenses over seven years. With accelerated depreciation, the company may be allowed to allocate $2,000 of the cost of the truck for the first few years.

Advantages

Accelerated depreciation leads to tax savings in the early years of the asset. The positive cash flow that accelerated depreciation generates improves the rate of return of the asset.

References

• The Freedictionary: Accelerated Depreciation
• The Freedictionary: Straight-line Depreciation
• Business Accounting Guides: Accelerated Depreciation Methods for Tax Savings
• Review of Business Taxation: The Case for Accelerated Depreciation

Resources

• Tax Almanac: Internal Revenue Code: Section 168