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?

Please provide a detailed answer. Thanks in advance.

Answer 1

Accelerated depreciation is the allocation of a plant asset's cost in a faster manner than the straight line depreciation. Compared to straight line depreciation, accelerated depreciation will mean 1) more depreciation in the earlier years of an asset's life and 2) less depreciation in the later years of the asset's life. [Note that the total amount of depreciation over the asset's life will be the same regardless of the depreciation method used.] Hence, the difference between accelerated depreciation and straight line depreciation is the timing of the depreciation.

Following are the advantage of using accelerated depreciation as compared to straight line depreciation -

1. The most common reason to use accelerated depreciation to lessen net income.

2. It is better to take income tax savings earlier in the lide of an asset., Showing less income lowers the amount of income tax owed by the company.

Accelerated depreciation method will be more beneficial to start up company like jackrabbit because accelerated depreciation means more depreciation in the earlier years of the asser. And if depreciation is more income will be less and assessee is required to pay less income tax which would be beneficial to jackrabbit in the initial years of his start up.