The Use of Accelerated Depreciation
In accounting, depreciation occurs when a business distributes the cost of an asset over a period of time in its books. A company may spend a large amount of money up front for a purchase, such as a factory machine, but it will not record that total amount on its books, instead splitting the cost up throughout the years of the machine's use. This more accurately allocates expenses to the use of the machine and is a method required by the IRS. Some businesses use a straight line method of depreciation that splits the expense evenly across the years of the asset's useful life, but others use an accelerated schedule.
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Accelerated Schedule
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Accelerated depreciation speeds up the depreciation accounting, recording a large amount of the asset cost in the first few years of its operation and far less in later years. The IRS allows this type of depreciation under the modified acceleration cost recovery system, or MACRS, which lists a multitude of assets and the schedules by which they should depreciated. Most are based on percentages that end up allocating most of the expense shortly after the product has been put into use, which is often an accurate reflection of many assets in business operations.
Revenue Benefits
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Businesses prefer accelerated depreciation for several reasons, which are influenced by business forecasting. For instance, a business that has a large amount of revenue in the present and knows it will continue to have revenue for the next year or two, but is uncertain about revenue flows after that, often prefers the accelerated schedule. That way the business can represent the costs when it knows the books will also record lots of revenue, rather than having to record a high portion of the expense when the books show low income, leading to even lower records and possible losses shown on the books, which make financing and investment more difficult.
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Tax Benefits
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Businesses have a second key reason to use accelerated depreciation -- tax savings. Even if a business is expecting revenues to continue in the same amount for years to come, recording most of the expense for an asset immediately allows the business to report lower income, and lower income means lower taxes. This can actually benefit a business making high revenues, allowing it to keep the revenues and pay less taxes by recording expenses to "cover up" the income level.
Investment Plans
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The tax benefit saves money for the successful company that uses accelerated depreciation, which leads to a more fundamental reason for using the accelerated schedule. When possible, a business should always depend on current revenues. The money saved in current years can be used for investment and spent wisely, creating a return that the business can profit from. This is often better than planning on future savings that may or may not occur.
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