Accelerated depreciation

What it means

Accelerated depreciation is a tax method that writes more off in the early years than straight-line depreciation does. The total written off is identical; only its spread over time changes, and with it the tax base of each year.

It is not open to every asset: it may be used only for tangible assets in the second and third depreciation group, meaning machines, equipment and production technology. Buildings and passenger cars cannot be written off this way.

Acceleration does not shorten the depreciation period: the asset is written off over the same number of years as under the straight-line method, only more in the early years and less in the last ones. The net book value therefore falls faster from the outset, leaving only small amounts to be written off in the later years.

How it works in practice

The annual charge for the first year is the entry price divided by the first-year coefficient, but only the part matching the months since the asset entered use is claimed. In later years the charge is twice the net book value divided by the coefficient reduced by the number of years already depreciated; the Act fixes the coefficients for each group separately.

The method is chosen when the asset is put into use and stays fixed for the whole period. It goes into the depreciation plan, accounting depreciation need not match it, and the difference is added back or deducted in the tax return.

If a company plans to sell a machine after a few years, the accelerated method leaves a lower net book value on disposal and a larger taxable gain on the sale. Over the whole period the tax comes out the same; it simply moves into the year of sale. We go through this with the client at the time of purchase so they know what to expect.

What to watch out for

The accelerated method gets picked in a year the company slides into a loss. The larger charge only deepens the loss, the relief moves to later years, and the method cannot be switched back. The right move is to suspend depreciation and shift the charges into a profitable year.

Accounting depreciation gets set to match the accelerated tax charge because it is convenient. Profit and the carrying value of assets on the balance sheet fall below reality in the early years, and a bank watching its covenants sees a weaker company than the real one. When applying for a loan, that can cost better terms.