In order to secure tax credits on assets faster, the idea of accelerated depreciation has been practiced. Basically, accelerated depreciation permits the owner to take bigger write-offs for the depreciation of chosen properties and goods early on, with the thought in mind that the properties and goods will no longer be eligible similar to the level of depreciation in the coming years. Here are some cases on how depreciation works and how significant accelerated depreciation is.
The basic concept of depreciation is that as any property or goods ages, there is wear and tear which can transform the item to its less value. Depreciation takes into consideration the reduced worth and permits businesses to enroll an equitable and fair current value upon assessing the whole net worth of the company. That certain amount of depreciation is usually considered as a tax deduction for the whole year.
Accelerated depreciation works by giving the owner a good advantage of higher tax deductions now other than later. This means that the owner will not be utilizing the what we call straight line depreciation. Straight line depreciation means that the owner opts to go with an average depreciation amount compared to the accelerated type. This simply means that in the coming years, the owner might not be able to enforce for any claim with any depreciation on the asset. Yet, it means that the overall impact in utilizing the accelerated amount as tax shield for a span of a year or 2 years may be a good thing for the company in short term basis.
For instance, a company buys a new delivery van. In the first year, the company may declare standard depreciation on the van which can be used as tax deduction or declare the accelerated deduction and utilize the allowed depreciation for the next years to come. While this means that the van will obtain tax reduction in the later years, it does not imply that the amount of actual deduction in the first year will be enough to partially include the costs of buying the van. Generally, this means that the operating expenses of the whole year will be easier to cover. The major outcome is that the company receives a good tax break and also obtains the new van within one taxable year.
Upon using the concept of accelerated depreciation, extra care should be considered. While it is appealing because most assets and properties may be taken in the front end, there is a great possibility that the financial practice may result to problems in later years. Before taking this step, upon using accelerated depreciation, it is always best to weigh things first and take a look at different scenarios or circumstances where in accelerated depreciation is seen on the front end. Quality accounting and a financial officer may be a good option to take for consultation in order to determine if the company is to use or not the accelerated depreciation. This also to make sure that the company is compensating in its business.