Depreciation is one of the most common methods used by businesses to reduce their taxable income. However many do not understand the concept of accelerated depreciation. Additionally, they do not know how much money could be saved by using this method.
This post will provide a general overview of the concept.
As its name suggests, accelerated depreciation is the process of depreciating fixed assets at a fast rate early in their useful lives so that tax liabilities can be deferred to later tax years. This may help new businesses that need additional capital or that have been unexpectedly successful and do not want to stunt their growth with large tax bills.
There are a number of ways to increase the depreciation of certain assets. Two popular methods include the double declining balance method, which essentially multiplies the straight-line depreciation rate; and the sum of the years digits method, which takes into account the actual number of useful life years an asset may have. Both methods allow for additional depreciation to be factored in the early years of an asset’s life.
Of course, what may be saved on taxes this year, must be paid in the future. So it is critically important to make informed decisions regarding which depreciation method is right for your business. An experienced tax law attorney can help you make sense of the financial and legal implications of each method; both in the short term as well as the long term.
The preceding is not legal advice.