Application of the accelerated depreciation is quite widespread reception for providing faster tax credits on assets. It allows the owner to get more profits for reimbursement of expenses at some stages of development of the company.
The principle of the accelerated depreciation
Monetary accounting of wear of fixed capital and transfer on products as costs of production is the cornerstone eventually of the idea of depreciation. It can quite lower income of the company. Depreciation considers depreciation of the equipment and allows the enterprises to calculate the objective price of products of goods turnover. This sum joins in tax expenses for the current calendar year. Application of any given form of depreciation is based on search of ways of decrease in tax burden of the enterprise.
The accelerated depreciation is a depreciation on the overestimated norms, but at the same time increase in norms is allowed no more than twice. That is, the most part of cost of capital assets is written off for expenses in the first years of operation of fixed assets that allows the managing director to lower tax deductions on profit. It means that the owner will not use the mechanism of direct depreciation. Also it will mean that in the next years the owner will not be able to apply for depreciation of assets. Nevertheless, cumulative influence on use of the increased sum as the tax shield within a year or two actually can be in very good way for the company to remain afloat in the short term. The accelerated depreciation is not charged: on fixed assets the service life of which makes less than three years; on the rolling stock of the road transport as for them the wear is calculated proceeding from run size; on the unique equipment.
Advantages of the accelerated depreciation
For example, the enterprise buys the new delivery van. The first year, the company will have an opportunity to carry out standard depreciation of cost by means of tax deductions. Application of the accelerated deductions, and use of the most part of the allowed depreciation capital within the next several years will be an alternative to it. A negative side of this system will be the fact that the cost of the van will not be generated at the expense of tax deductions in the next years. The end result is that the company receives a good tax benefit and the new van, during one tax year. The accelerated depreciation gives the chance to increase own internal investments which consist of net profit and assignments on depreciation. At the same time depreciation investments (assignments) are always available and are at the disposal of the enterprise and also have no cost, kind of are "free" for the enterprise.
Shortcomings of the accelerated depreciation
It is necessary to show care when using the principle of the accelerated depreciation. At first sight, the concept can seem very attractive way to get the maximum profit on property and assets at first. However there is a certain probability that its application will lead to financial problems in the next years. Before making the decision to use the accelerated depreciation for receiving reduction in taxes, the good idea will be to check also other opportunities of a solution. In certain cases use of this technique by the companies brings more problems, than advantage. Will help to clear consultations at financial analysts or accounting company whether use of the accelerated depreciation is the best way out.