Question

Your friend is the accountant for Jackrabbit Inc., a computer server startup company. The friend asks you if accelerated depreciation would help Jackrabbit reduce the tax liability on a recent hardware purchase. What are some advantages of accelerated depreciation as compared to a straight-line method, and which method would benefit a startup company like Jackrabbit?

Answer 1

Accelerated depreciation allows companies to write off their assets faster in earlier years than the straight-line depreciation method and to write off a smaller amount in the later years.

Advantages: Accelerated depreciation

Accelerated depreciation method provides more tax shield in intial years as compared to Straight line method, since more depreciation reduces the net profit and the thereby the taxes owed. Thus the Companies with a large tax burden might like to use the accelerated-depreciation method, even if it reduces the income shown on the financial statement.

Method benefitting Jackrabbit:

Accelerated method of Depreciation will benefit Jackrabbit since in the beginning years of operation, the depreciation can be claimed at a higher amount which will reduce the net profit and thereby the taxes payable. Lower taxes will result in lower cash outflow. By the tax saving in form of lower cash outflow, the business can further invest to grow or meet its other obligation.