What Is Accelerated Depreciation?
Depreciation spreads an asset's cost over its useful life, and accelerated methods simply tilt that schedule forward. Instead of expensing an equal slice each year as straight-line does, an accelerated method records large deductions early and smaller ones later. Common approaches include double-declining balance, which applies twice the straight-line rate to the asset's remaining book value each year, and sum-of-the-years'-digits, which weights early years more heavily using a declining fraction.
The total depreciation over the asset's life is identical under every method; only the timing changes. That timing is exactly the point. A dollar of tax deduction taken today is worth more than the same dollar taken in year seven because of the time value of money, so accelerating deductions lowers the present value of a company's tax bill.
How It Works: Methods and a Worked Example
Take a $100,000 machine with a five-year life and zero salvage value. Straight-line depreciation records $20,000 per year. Double-declining balance applies a 40% rate to the remaining balance, producing $40,000 in year one, $24,000 in year two, and $14,400 in year three, before typically switching to straight-line for the remaining balance. The early-year deductions are roughly double what straight-line delivers.
In the United States, the tax code mandates its own accelerated system called MACRS (Modified Accelerated Cost Recovery System), which assigns assets to recovery periods and uses declining-balance conventions. Congress periodically layers on bonus depreciation, which at various points has allowed companies to deduct up to 100% of qualifying equipment in the year it is placed in service, along with Section 179 expensing for smaller businesses.
Why It Matters in Practice
Most US companies keep two sets of depreciation schedules: straight-line for the financial statements shown to investors and accelerated MACRS for the IRS. In the early years, tax depreciation exceeds book depreciation, so cash taxes paid are lower than the tax expense reported on the income statement. The gap accumulates as a deferred tax liability on the balance sheet, a line that analysts must model carefully in DCFs and LBOs because it unwinds as assets age.
The cash flow impact is significant for capital-intensive businesses. A company spending $1 billion a year on equipment can defer hundreds of millions of dollars in taxes under bonus depreciation, effectively receiving an interest-free loan from the government. Private equity firms factor this into deal models, and equity analysts watch for the step-down in cash flow when accelerated benefits fade.
