Accelerated Depreciation: Benefits, Limitations, and Comparison with Straight-Line

Accelerated depreciation is an accounting method used by companies to reduce their tax burden. It involves depreciating assets more quickly than the straight-line method, resulting in higher present value of tax depreciation in early years. The accelerated depreciation method includes double-declining balance and sum of year's digit methods, which are commonly used by companies for both financial and tax purposes. However, there are limitations to this method, such as lower deduction in future years and recaptured depreciation. Companies use accelerated depreciation to minimize start-up deductions, cost minimization, and cash flow, but it may not be suitable for all businesses due to record-keeping requirements and taxable income consistency.

Essay 1
Accelerated Depreciation

Introduction
This study aim is to provide a description of the topic “Accelerated Depreciation”. It
provides description of benefits of accelerated depreciation to the companies. It includes
different benefits such as enable to take higher open deduction, assets replacement, minimize
deduction and etc. Different limitations are also evaluated in the study such as recaptured
depreciation, and consider the clear preference.

Accelerated Depreciation
Depreciation is the method of accounting that allocates the cost of a tangible asset over the
useful life and this method is used to decrease value in accounts. There is decrease in the
value as there are not suitable market conditions. Moreover, in terms of businesses it
depreciates the long-term assets for the purpose of tax and accounting. In terms of accounting
purpose the expense of depreciation does not show the cash transaction but it represents how
much the assets value the business has taken into consideration over the period. The assets
include such as equipment, machinery, currency and etc. Depreciation comprises of different
methods such as accelerated depreciation method, straight-line depreciation method and etc.
According to the views of Kahn (2013), accelerated depreciation is the method of depreciation
that enables to make decrement in the value of long-assets. It has been depicted that
replacement cost should be equal when there is end of the assets. Accelerated depreciation is
defined by different authors differently. In the views of Gravelle (2011), it is defined as the
method through which higher depreciation deduction is produced in terms of starting years of
project. Jackson et al (2010), defines accelerated depreciation as the “allowance of stimulus
investment”. In terms of purposes of tax the depreciation method provides the way of
deferring corporate income taxes by making deduction in the taxable income for the current

years. Thus, it makes increase in the taxable income in future years. There are many
companies that pay taxes on profit by decreasing revenue from expenses. It has been
evaluated that expense if of different types such as salary paid to workers, inputs cost,
depreciation and amortization. In financial accounting as well as tax accounting the company
is not able to claim the entire capital asset cost. In terms of government it provides
opportunity to postpone taxes if there are specific policies reasons to encourage the
companies. The government has increased accelerated depreciation method in time of stress
of economic.
Moreover, in the companies, there was an issue in measuring the change in the 20th century
due to this it leads to negative results. Thus, to overcome this issue there was establishment of
accelerated depreciation. It was developed in order to decrease the value of the assets on the
balance sheet. In the past time also this method has been adopted by the companies as it helps
the company to decrease the value of the assets to be at the rate in which it is expected.
In addition, there are different benefits of using accelerated depreciation. It is described as
below:
Minimizes start-up deductions

This accelerated depreciation can reduce the start-up cost by increasing the deductions that
are adopted at the time of business first-year operations. It enables the businesses to minimize
the debt of business as due to this it can use the money in other things like marketing, or
expanding the business to another country (Panteghini and Vergalli, 2016).
Enable to take the higher open deduction
It is another benefit of accelerated depreciation that enables the business to take the higher
deduction as it would be helpful in reducing the current tax bills. This depreciation method is
helpful when there is Startup Company. It is really helpful for the new businesses.
Working as the tax deferral
This method has developed the increased deductions where the business would be able to
defer the portion of its tax debt. With the help of this method, the company can make
deductions in the taxes if it is trying to reduce the tax that is owned currently. It can be paid
within the time (De Waegenaere and Wielhouwer, 2011).
Assets replacement

This is also benefit of accelerated depreciation that may encourage the taxpayer to make
replacement of old machinery or equipment before making the end of its useful life by
adopting new models and the tax advantage is also gained.
It has been determined that it enables the business to make progress investment in the fixed
assets in the starting years of the life of assets. It is one of the essential factors in any situation
where there is high rate of change in technology. Apart from this, it is essential at time when
inflation is the factor as well there is limitation of depreciation in terms of real cost of long-
term asset (Ibarra, 2013). It provides an incentive for making investment in the fixed assets
and it helps in growing company. In addition, this method helps the companies to have better
purpose for the growth.
In contrast to this, there are different limitations of using accelerated depreciation method by
the companies. It is described as below:
Lower deduction in future
This is the method by which there is speed in the recognition of depreciation deductions. This
is the major limitation of the accelerated depreciation method. Due to this system there is
large number of tax deductions. The high upfront deduction comes from the decrease in

deduction in future (Radu and Marius, 2011). Thus, it may be a problem for the growing
business. When there is increase in the growth of business it would depict increase in the
growth of income. This would also lead to move in the high tax rate.
Preference should be cleared
This is also the limitation of accelerated depreciation by which the expense is reduced at a
greater rate.
Future deduction problem for the growth of business
It is the limitation of accelerated depreciation. This accelerated depreciation method the
deduction is identified as well as there is no deduction of large tax in terms of higher upfront.
Depreciation recaptured
It is another limitation using accelerated depreciation as there would be a high risk of
recaptured depreciation. On the basis of depreciation of schedule it has been analyzed that
long-term assets are sold before it is considered as worthless.
Furthermore, accelerated depreciation is for the purpose of reduction in tax. There are
different conditions that should be fulfilled while making depreciation on the property.

Firstly, the property should be maintained in an appropriate way so that it can be used for the
purpose of business. Secondly, the property should be the thing that may be obsolete or have
run out due to the uncertainty. Thirdly, the life of the property should be more than one year
(Deepak et al., 2010). Along with this, accelerated depreciation is the method that is helpful to
improve the fixed investment as well as deferred assets in the first year of starting up of
business. It has been analyzed that accelerated depreciation method the cost of the asset is
canceled.
The difference can be identified among accelerated depreciation method and straight-line
depreciation method. Straight-line is the commonly used method that is easy to calculate and
it comprises of asset value in installments equally in terms of cost of its useful life. On the
other hand, accelerated depreciation method is the method by which company’s financial
accounting or there is depreciation of tax. For the accounting method it is more productive in
the past years. This would be helpful for companies to pay their expenses easily in an
effective manner (Liapis and Kantianis, 2015). Accelerated depreciation method has different
types such as double-declining balance method and sum of year’s digit method. The methods
of accelerated depreciation are depended upon the tax law in regard to tax purpose. It has
been depicted that these accelerated depreciation methods are used in USA for the tax

purpose. Apart from this, by this method depreciation is analyzed with a higher amount in the
beginning years. The use of accelerated depreciation method is logistical. Hence, it can be
determined that depreciation of assets is not done in the same way as used by the individual
thus this depreciation method is tended to occur.
In contrast to this, accelerated depreciation is not used at a time as in this method evaluation
as well as record keeping is required so there are many companies who avoid using this
depreciation method. The company also not uses this depreciation method when there is no
use of taxable income on a consistent basis. This method may also be avoided by the
companies if their fixed assets are not large in number. Though, it is beneficial for the growth
of the company as with the help of this depreciation method the tax basis may get written
faster (Mintz and Chen, 2011). It is one of the best methods in order to make reduction in the
taxable income. The savings attained by the company can be used for the purpose of
marketing as well as other expenses. In addition, double-declining method is the type of
accelerated depreciation method where formulae are = “2*straight-line depreciation rate *
book value at the beginning year”. On the other hand, Sum of year’s digital method formulae
= Applicable percentage = No. of years of life.

Basically, accelerated depreciation method reduces the capital cost that is adopted by the
enterprise so that there is decrease in the investment cost for producing the cash flow. The
example is provided in order to determine how accelerated depreciation works. XYZ
company that purchased piece of machinery $2, 00,000 and life estimated is for 10 years. If
the company uses straight-line method in against of accelerated depreciation method then
there would be record of expense in income statement (Perotti, 2012). Hence, if it uses the
accelerated depreciation method then there would be more expensive of assets in the
beginning years for overcoming the future years. Double-declining is one of the most used
methods in accelerated depreciation.
Apart from this, the depreciation method is adopted in the income tax return that would be
quite greater in terms of depreciation expense. In the company, when the consistent taxable
income is used in regard to accelerated depreciation on the return of income-tax. On the basis
of the analysis, it has been depicted that accelerated depreciation results in high present value
of the tax depreciation in the first period. In terms of country Sweden historical evidence is
provided where there is possibility of bad investments then there is the use of accelerated
depreciation method which is adopted in terms of tax reduction. There are different other
factor that encourages the companies not to use accelerated depreciation (Nuţǎ, and Nutǎ,

2012). Hence, this method is used by most of the companies as compared to another method
such as straight-line method. In contrast to this, for the small companies using accelerated
depreciation would be weak at the time of decrease in the expectation of tax rate. It can be
said that using accelerated depreciation may create issue if there is increase in the rate tax.
On the basis of the description of accelerated depreciation, it can be summarized that
accelerated depreciation can be considered as the accounting form that enables the business
to make deduction in the tax. This method is used for the purpose of tax as well as for the
purpose of finance. It has also been determined that in the financial accounting the
accelerated depreciation is used for the purpose when there are assets expected to be more
productive in the first years. The assets part would be represented in an appropriate manner.
Mostly, the company uses methods in accelerated depreciation are double-declining balance
method and sum of year’s digit method. It has been resolute that Accelerated depreciation is
for the purpose of reduction in tax. There are different conditions that should be fulfilled
while making depreciation on the property. Firstly, the property should be maintained in an
appropriate way so that it can be used for the purpose of business. Secondly, property should
be the thing that may be obsolete or have run out due to the uncertainty. Thirdly, the life of
the property should be more than one year (Bargeron et al., 2011). It has also been examined

that accelerated depreciation is used by the companies which are startup in order to reduce
the tax. It is also used by the companies in terms of writing-off equipment that would be used
before the end of its life.
Conclusion
On the basis of the above analysis, it can be concluded that accelerated depreciation is one of
the most essential methods that is being used by the companies in order to reduce the tax
burden. The savings of the company from tax can be used for other things such as marketing
as well as expanding the business to another country. It has been resolute that there are
different benefits of using accelerated depreciation in the company. It includes such as
Minimizes start-up deductions, cost minimization, tax delay, cash flow, enable to take higher
open deduction and etc. Different limitations are also analyzed of accelerated depreciation it
includes such as lower deduction in future, and recaptured depreciation and etc. The report
also discusses that accelerated depreciation is also useful for financial purpose. It has been
depicted that in terms of country Sweden historical evidence is provided where there is
possibility of bad investments then there is the use of accelerated depreciation method which
is adopted in terms of tax reduction. Accelerate depreciation method includes two types such
as double declining method is the type of accelerated depreciation method where formulae

are = “2*straight-line depreciation rate * book value at the beginning year”. On the other
hand, Sum of year’s digital method formulae = Applicable percentage = No. of years of life.
The methods of accelerated depreciation are depended upon the tax law in regard to tax
purpose. It has been depicted that these accelerated depreciation methods are used in USA for
the tax purpose. Apart from this, by this method depreciation is analyzed with the higher
amount in the beginning years. The use of accelerated depreciation method is logistical. In
the contrast to this, accelerated depreciation is not used at a time as in this method evaluation
as well as record keeping is required so there are many companies who avoid using this
depreciation method. The company also not uses this depreciation method when there is no
use of taxable income on the consistent basis. This method may also be avoided by the
companies if their fixed assets are not large in number.

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