Depreciation is the reduced value of something over time. Accelerated depreciation is any loss of value where the business depreciates (i.e., accounts for the value loss of a fixed asset in tax filings) at a greater proportion of an asset’s expected lifetime value loss earlier in its life.
This method of depreciation contrasts with straight-line depreciation method, where the asset’s value is depreciated proportionally throughout its useful life.
For example, business A and business B each purchase the same tractor model, each paying $100,000, and each tractor having an expected lifetime of 10 years.
- Business A uses the straight-line depreciation method, valuing its tractor evenly at $10,000 lower each year for 10 years.
- Business B uses accelerated depreciation, valuing its tractor $20,000 lower each year for a period of 5 years.
Depreciation of an asset reduces taxable income, so accelerated depreciation may be financially advantageous. It can be advantageous because of the time-value in money: a particular sum of money now is worth more than that same sum of money in the future because the money can earn interest on investments over time. Thus, a business will effectively pay less in taxes if it takes bigger deductions now in exchange for smaller deductions in the future.
One common accelerated depreciation method is MACRS.
[Last updated in October of 2024 by the Wex Definitions Team]