Depreciation is the use of an asset will cause a loss of value over time after its initial purchase due to its deterioration or normal wear and tear. The fixed assets include the following: buildings, furniture, office equipment, machinery and many more. A land is the only exception which cannot be depreciated as the value of land appreciates with time.
One of its methods is the accelerated depreciation. It is an accounting practice that allows the owner of an asset to depreciate the asset more quickly by using a shorter period of depreciation. With this, a tax basis may now be written off more quickly. Here’s the benefits of accelerated depreciation:
Lessens the start-up deductions
This option can reduce start-up costs by increasing deductions that are taken during your business’s first years of operation. This will allow you to reduce your overall business tax debt, which means that you will have more money that you can use for marketing, purchasing equipment and growing your company. This also means that you will have increased chances to succeed in the market.
Let the business owner to take a higher upfront deduction
Another huge advantage of accelerated depreciation is that it allows you to immediately take a higher deduction, and so, you can reduce your current tax bills. This is really helpful especially when you have a new business that might be having problems with short-term cash flow. Also, by maximizing deductions today, you will be able to avoid delayed deductions in the future when it happens that your business no longer exists.
Helps in tax deferral
As this depreciation system creates increased deductions, your business will be able to defer a portion of its tax debt. If your company is trying to reduce taxes that it currently owes, deferring tax debts with the use of this approach will provide you additional time before the time when you must pay your taxes in full amount.
Lowers the future deduction
An accelerated depreciation system only speeds up the recognition of depreciation deductions. These systems do not create a larger tax deduction. The higher upfront depreciation deduction from these systems comes at the expense of a lower deduction in the future. For a growing business, this can be a problem. As a business grows its income, it will move into a higher tax rate. By accelerating your business’s deductions, you will have fewer options in the future to reduce your taxes when you business may be in a higher tax bracket.
Recaptures the depreciation
Another problem with accelerated depreciation systems is they have a greater risk of recaptured depreciation. You may decide to sell a long-term asset before it is considered worthless according to its depreciation schedule. If you sell the asset for more than its current accounting value, your profit will be considered recaptured depreciation. Your recaptured depreciation profits will be taxed as income. Accelerated systems have a higher cost of recaptured depreciation because they recognize more depreciation upfront.
Reduces the cost reduction
The overall cost of expensive equipment or real estate can be significantly reduced with accelerated depreciation. When real estate or equipment is leased or purchased with loans, the tax savings created by accelerated depreciation can be used to make additional payments toward loan principals or outstanding lease amounts. These additional payments will also reduce the overall interest paid by reducing the outstanding balance owed each year.