Accelerated Depreciation As A Short Term Cash Flow Infusion

Accelerated depreciation is a method of taking standard tax credits for depreciation on an item in advance. However, though a company could choose to use the accelerated method of depreciation it is with the understanding that later on the depreciation would not be available. The concept might sound complicated but actually it is relatively simple.


The idea behind the standard tables for depreciation is that an asset will lose value each year it is in use which reduces its worth. The government allows this to be taken in the form of a tax credit. The table governing these credits works by averaging the depreciation of an item over a set number of years.


When using an accelerated approach to depreciation a lot of the value of the item could be recovered in a short amount of time by claiming more depreciation at one time. What happens is that if an item has a specific dollar value in depreciation which lasts over 20 years the entire allowable amount of depreciation is the dollar amount times the number of years. Accelerating the depreciation would allow a business to claim more of the depreciation credit over fewer number of years.


This can actually provide a short-term cash flow boost for some companies. However, in the long term there are no real gains since the entire amount of depreciation is fixed no matter how it is taken. These tax credits taken gradually help the company maintain a predictable cash flow. Taking most of them at the front can result in cash flow problems later if careful thought is not given to the consequences.


While some might see this method of depreciation as a means to actually make a profit or attractive it is simply a faster way of getting credits due them. The total amount that can be claimed on any asset is unchanged. On the other hand it does help boost the cash flow.


There are instances when this type of depreciation is used in financial reports instead of taxes. This can help the balance sheet look much better but it does not actually change the financial situation. However if in one year a corporation has made significant investments in equipments it can help to accelerate the depreciation tables.


When using accelerated depreciation for tax purposes there are limits to the amount that can be depreciated in any given period. There are two methods for determining the rate of depreciation, ACRS and MARCS. Both methods limit the amounts and time over which such depreciation can occur.


Some local and state governments encourages this because free cash can help stimulate the economy. That can also be a reason that some companies use the accelerated tables, in order to invest further in equipment or holdings. The improved cash flow can help fund further investments and improve profits.


No method is suitable for every single company but accelerated depreciation can benefit some businesses. In times where the flow of cash is tight, this can help. It is always wisest though, for the company to seek the advice of an accountant to determine if there might be long range negative consequences.