What is Accelerated Depreciation?

Definition

Accelerated depreciation is any depreciation method used for accounting or tax purposes that allows for higher depreciation expenses in the earlier years of an asset's life. Common methods include the Double Declining Balance (DDB) method, which results in higher expenses initially and lower expenses as the asset ages.

Origin

The concept of accelerated depreciation originated in the mid-20th century, evolving as businesses sought more flexible financial management tools. It was initially designed to help companies gain more tax deductions early in an asset's life, thereby encouraging investment and economic growth.

Categories and Features

Accelerated depreciation mainly includes the Double Declining Balance method and the Sum-of-the-Years-Digits method. The Double Declining Balance method provides higher depreciation expenses early on, suitable for assets with rapid technological obsolescence. The Sum-of-the-Years-Digits method reduces tax burdens early through accelerated depreciation. Both methods offer higher cash flow in the early stages but may result in lower depreciation expenses later.

Case Studies

Case 1: Tesla uses accelerated depreciation on its production equipment to gain more tax deductions early, supporting its rapid expansion. Case 2: Amazon applies the Double Declining Balance method on its warehousing facilities to reduce initial tax burdens, increasing cash flow for reinvestment.

Common Issues

Investors often misunderstand that accelerated depreciation increases long-term tax burdens. In reality, it merely shifts the tax burden from the early to the later years. Another common issue is that an inappropriate choice of depreciation method can increase volatility in financial statements.