Use of Accelerated Depreciation Methods Allows Shifting of Income
Use of Accelerated Depreciation Methods Allows Shifting of Income
The past two decades of tax law have created more opportunities than ever for business owners to defer tax amounts. Today, it is common practice for businesses to rely on accelerated depreciation to help lessen the burden of taxes imposed on corporate profits, and also shift their income to ethically maximize financial growth. For the purpose of accounting, accelerated depreciation intends to reflect how much of the corporation’s asset is being used up each year, assuming that the highest rate of productivity is found in the first few years. This type of tax allowance qualifies as an initial allowance in the first year, or can be spread out over several years (“Accelerated Depreciation” 2009). In 1954, the provision permitting accelerated methods of depreciation was the first significant tax incentive offered to tax payers. Although this allows corporate tax payers to recover capital investments sooner, the deduction is limited to the depreciable cost of the asset, which thereby affects only the timing rather than the overall amount of depreciation. This tax code was passed by the United States government in an effort to encourage businesses to generate capital for investment, stimulate economic growth and increase national rates of output and employment (Stockfisch 1957). The financial benefit, therefore, to the corporate tax payer is the time value of the money that results from postponing the tax payments on each applicable asset. This arrangement presents the unique opportunity to shift income, and is often thought of as government loaning, since the company is able to hold onto the capital for a limited period, while potentially raising their total tax income over years (Carmichael et al 30-33).
Based on academic models and field applications, I have found there to be numerous benefits of using accelerated depreciation methods to shift income. For instance, there are a few different
The past two decades of tax law have created more opportunities than ever for business owners to defer tax amounts. Today, it is common practice for businesses to rely on accelerated depreciation to help lessen the burden of taxes imposed on corporate profits, and also shift their income to ethically maximize financial growth. For the purpose of accounting, accelerated depreciation intends to reflect how much of the corporation’s asset is being used up each year, assuming that the highest rate of productivity is found in the first few years. This type of tax allowance qualifies as an initial allowance in the first year, or can be spread out over several years (“Accelerated Depreciation” 2009). In 1954, the provision permitting accelerated methods of depreciation was the first significant tax incentive offered to tax payers. Although this allows corporate tax payers to recover capital investments sooner, the deduction is limited to the depreciable cost of the asset, which thereby affects only the timing rather than the overall amount of depreciation. This tax code was passed by the United States government in an effort to encourage businesses to generate capital for investment, stimulate economic growth and increase national rates of output and employment (Stockfisch 1957). The financial benefit, therefore, to the corporate tax payer is the time value of the money that results from postponing the tax payments on each applicable asset. This arrangement presents the unique opportunity to shift income, and is often thought of as government loaning, since the company is able to hold onto the capital for a limited period, while potentially raising their total tax income over years (Carmichael et al 30-33).
Based on academic models and field applications, I have found there to be numerous benefits of using accelerated depreciation methods to shift income. For instance, there are a few different
References: "Accelerated Depreciation." Encyclopedia Britannica. Accessed online on 18 Oct 2009 from: . Carmichael, Douglas R., Ray Whittington and Lynford Graham. Accountants’ Handbook, Volume 1. Hoboken, NJ: John Wiley & Sons, Inc., 2007. Print. Fishman, Stephen. Deduct It! Lower Your Small Business Taxes (5th ed). Berkeley, CA: Delta Printing Solutions, Inc., 2008. Print. Stockfisch, J.A. “Investment Incentive, Taxation, and Accelerated Depreciation.” Southern Economic Journal, Vol. 24, No.1, July 1957.