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Simple English definitions for legal terms
accelerated depreciation method
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A quick definition of accelerated depreciation method:
The accelerated depreciation method is a way to estimate how much an asset will wear out or become obsolete over time. This method is useful for calculating how much money a company can deduct from their taxes each year for the depreciation of their assets. The accelerated method allows for larger deductions in the earlier years of an asset's life and smaller deductions in the later years. There are other methods of depreciation, such as the straight-line method, which spreads the cost of the asset evenly over its useful life. Each method has its own formula for calculating depreciation.
A more thorough explanation:
The accelerated depreciation method is a formula used to estimate the wear, use, or obsolescence of an asset over its useful life. This method is useful in calculating the allowable annual tax deduction for depreciation.
Unlike the straight-line depreciation method, which spreads the cost of an asset evenly over its useful life, the accelerated depreciation method allows for larger deductions in the earlier years of an asset's life and smaller deductions in the later years. This can be beneficial for businesses that want to reduce their taxable income in the short term.
For example, let's say a company purchases a machine for $100,000 with a useful life of 5 years and no salvage value. Using the straight-line method, the annual depreciation expense would be $20,000 ($100,000 divided by 5 years). However, using the double-declining balance method, the company could deduct $40,000 in the first year, $24,000 in the second year, $14,400 in the third year, and so on.
Overall, the accelerated depreciation method can help businesses save money on taxes in the short term, but it may result in a higher tax bill in the long term as the deductions decrease over time.