Accelerated Depreciation and Why It Is a Tax Advantage?

What are the pros and cons of straight line depreciation versus accelerated depreciation methods? Here’s how you can decide if straight line depreciation is right for your business. Accelerated Depreciation is an accounting method that allows the owner of an asset to depreciate the asset more quickly by using a shorter period of depreciation than the traditional straight-line method.

  • Looking for a comprehensive fixed asset and depreciation accounting software?
  • Suppose that trailer technology has changed significantly over the past three years and the company wants to upgrade its trailer to the improved version while selling its old one.
  • The third scenario arises if the company finds an eager buyer willing to pay $80,000 for the old trailer.
  • For example, if a computer is expected to last five years, it will be depreciated by one-fifth of its value each year.
  • That boosts the income statement by $3,750 per year, all else being the same.
  • The large tax deduction for the year can mean more money is available to your business to spend on more assets or use in some other productive way.

If the use of an asset will vary greatly from year to year, the units-of-production method may be appropriate. Using the furniture example, we can see the journal entry the business would use to record each year of depreciation. The bonus depreciation allowance is 100% for property acquired after September 27, 2017, and placed in service before January 1, 2023. This is true for amortization and writing off any other asset such as impaired assets and/or obsolete inventory. To see this side by side, we get the following table using the same assumptions as before but with the added maintenance expenses. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

These studies should be performed by professionals with construction, engineering, and tax experience to correctly segregate the costs of your assets into either 5, 7, 15, 27.5 or 39-year lives. In addition to straight line depreciation, there are also other methods of calculating depreciation of an asset. Different methods of asset depreciation are used to more accurately reflect the depreciation and current value of an asset.

Accountants find it more straightforward, and it makes their calculations simpler and less prone to error. The calculation involves only three factors, so it’s not a complicated formula, and that reduces the amount of recordkeeping needed for financial statements. There are pros and cons to using the straight-line method of depreciation. It’s popular with some accountants, but unpopular with some businesses and other accountants because additional calculations may be required for some industries. One of the key aspects of straight-line depreciation is the concept of “useful life.” In understanding straight-line depreciation, you need a good estimate of the useful life of the asset. It’s possible to use different methods of depreciation for different assets, but the same method must be consistently applied for the life of an asset.


In this article, we will look at two types of depreciation namely, Accelerated Depreciation and Straight-Line Depreciation. Let’s investigate the distinctions between the two, and then talk about how you might use each one in your company. Accelerated Depreciation is suitable for assets that have a long life and high value while Straight-Line is suitable for assets with shorter life and less value.

A system for calculating accelerated depreciation (called MACRS) was adopted as part of the Tax Reform Act of 1986. The 2017 Tax Cuts and Jobs Act is the most recent tax law dealing with accelerated deprecation, including section 179 deductions and bonus depreciation. One important feature of this legislation is that section 179 deductions are now permanent. Bonus depreciation (“Special Depreciation Allowance”) allows a business to get an additional deduction on qualified property in the first year it’s put into service. The property must be depreciated under MACRS and have a useful life of at least five years.

  • Additionally, you can calculate the depreciation rate by dividing the depreciation amount by the total depreciable cost (purchase price − estimated salvage value).
  • In addition, there is a total limit of $2,590,000 that you can deduct for all qualifying section 179 property for that tax year.
  • You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
  • By writing off more assets against revenue, companies report lower income and thus pay less tax.
  • Our team’s blend of engineering and tax code expertise provides tremendous value throughout a project.

To calculate the straight-line depreciation, you subtract $300 from $4,500 and divide by 7. The cost basis includes the price you paid for the asset itself, but it also includes extra costs you paid such as sales tax, shipping and handling charges, and installation costs. The salvage value is what you expect the asset to be worth at the end of its useful life. Our team’s blend of engineering and tax code expertise provides tremendous value throughout a project. For small business owners, knowing which method of depreciation is best and how to record it in your accounting system can be difficult to manage. It is a good idea to hire a CPA or use accounting software such as Xero to make the calculations easier.

What is the straight-line method of depreciation?

Using the straight-line depreciation method, the business finds the asset’s depreciable base is $40,000. Finishing the formula, the business finds the asset’s annual depreciation amount is $4,000. The entire value of the asset ($40,000 depreciable base) will be reclassified into the expense account over time.

How to Sell Your Business Valuation Models

Running a business is no small feat and companies need both tangible and intangible assets to operate and drive profitability. However, being able to properly manage the costs and navigate the tax complexities can be challenging. The same concept applies for depreciation expense, which is a portion of a fixed asset that has been considered consumed in the current period and is then charged as a non-cash expense. Typically, the accumulated amortization account is reflected on the balance sheet as a contra account (which offsets the balance in a related account) and is tied with the intangible assets line item. This number will show you how much money the asset is ultimately worth while calculating its depreciation. By estimating depreciation, companies can spread the cost of an asset over several years.

Straight-line depreciation examples in the real world

In addition to its application in accounting, it is also put to use in the process of calculating tax deductions. Both the Accelerated Depreciation and Straight-line are good methods of calculating asset value over time and are both used in tax deductions and for accounting purposes. Depending on your business and asset type you can choose which method to use. With this information, you will be able to make a wise choice between the two methods for your assets. In a double-entry bookkeeping system, there are just two lines to the journal entry.

Accelerated depreciation methods apply a higher amount of depreciation at the beginning of an asset’s useful life and a lower amount of depreciation toward the end. Your write-offs will be higher up front if you use an accelerated depreciation method. For example, due to rapid technological advancements, a straight line depreciation method may not be suitable for an asset such as a computer.

Additionally, you can calculate the depreciation rate by dividing the depreciation amount by the total depreciable cost (purchase price − estimated salvage value). The straight-line depreciation method is a common way to measure the depreciation of a fixed asset over time. The method can help you predict your expenses, know when it’s time for a new investment and prepare for tax season.