What is accelerated depreciation?
Well, in layman’s terms, it is the depreciation of fixed assets at a faster rate early in their useful lives. Accelerated depreciation reduces the amount of taxable income in the early stages of asset life. The result is, tax liabilities are deferred. The net effect of accelerated depreciation is the company pays more taxes in later years. Time-value of money proves our dollar is worth more today than tomorrow.
Are there different methods of accelerated depreciation?
There are several calculations available for accelerated depreciation. One is the double-declining balance method…another is the sum of the year digits method. For our purposes, we will discuss the double-declining balance method of accelerated depreciation. This method of accelerated depreciation is applied when cost segregation has been employed to allocate building components according to the Internal Revenue Code. Accelerated depreciation, using this double-declining balance method, is applied under Modified Accelerated Cost Recovery System (aka, MACRS). MACRS uses 5 basic depreciable periods (5, 7, 15, 27.5, & 39.5 years) as applied to building components. Under special circumstances, these periods can vary. For example, in Oklahoma, much of the state is designated as Qualified Indian Reservation Property. As a result, these depreciable periods change to 3, 5, 9, 20, and 22 years.
What does accelerated depreciation do for me?
Simple. Accelerated depreciation does these things:
- Complies with the Internal Revenue Code
- Increases the available depreciation to write off your taxes today
- Decreases or temporarily eliminates federal income taxes
- Increases your available cash for use today
- Reduces your commercial property taxes
- Possible reduction in your P&C insurance premiums
- Increases debt-service coverage for banks and lenders
- possibly negotiate lower interest rate, or
- possibly reduce capital reserve requirements, or
- possible eliminate down payment requirement for new loans
Does applying accelerated depreciation make sense for me?