Question

In healthcare, how might depreciation differ in not for profit organizations vs a for profit organization? Why?

Answer 1

In healthcare industry depreciation in not for profit organizations is done generally using a straight line method. In this method the cost of the asset is depreciated uniformly over the life of the asset. For instance if the cost of the asset is $100,000 and its life is 10 years then annual depreciation will be = $100,000/10 years = $10,000 per year.

In case of for profit organizations in the healthcare industry depreciation is done usually using the double declining method. In this method the annual depreciation will be double the rate of the rate as per straight line method. Take the hypothetical example given above. The straight line rate is 100%/10 years = 10% per year. The rate in case of double declining method will be 10%*2 = 20%.

The reason why for profit healthcare organizations do not use straight line method but rather use double declining method is because it leads to tax advantages. In case of double declining method the amount of depreciation will be higher in initial years and so the for-profit firm will benefit in the form of higher amount of depreciation tax shields during the initial years of the asset.