The Language of Real Estate – Learning Real Estate one word (or phrase) at a time)
Accelerated Depreciation
Accelerated depreciation (theoretical depreciation, a noncash” expenditure) is a method of allocating the cost of a tangible asset over its useful life for accounting and tax purposes in a way that allows for larger depreciation deductions in the earlier years of the asset’s life. This approach is typically used to reflect the reality that most assets lose their value more quickly in their early years of use.
With accelerated depreciation, a higher portion of the asset’s cost is expensed as depreciation in the earlier years, which reduces taxable income during those years and provides tax benefits. This allows businesses to write off a greater portion of the asset’s cost sooner, which can result in reduced tax liabilities and improved cash flow.
A result of taking depreciation for tax purposes is that it lowers the basis of the property, resulting in a larger capital gain when the property is sold. It is said of depreciation that it “turns ordinary income into capital gain.”
There are different methods for implementing accelerated depreciation, such as the double declining balance method and the Modified Accelerated Cost Recovery System (MACRS) used in the United States. These methods use formulas and rules established by tax authorities to determine the specific depreciation amounts for each year of an asset’s life.
Accelerated depreciation is contrasted with straight-line depreciation, in which the same depreciation expense is deducted each year over the asset’s useful life. (the same amount each year over the life of the property as set by the IRS).
Accelerated depreciation methods are often preferred by businesses to lower their immediate tax burden and improve cash flow, but they may result in lower depreciation expenses in the later years of an asset’s life.
