Do accelerated depreciation result in payment of less taxes over the asset's life?

Answer 1

I assume you are posting from America and are referring to the American tax system.

YES!

Here's how.

1) Accelerated Depreciation reduces your current year income, by having more deductions. Your income is lowered, and the tax is reduced from the top band slice of your income.

2) In the year of sale, you have to add back all that depreciation. The depreciation addback is [caveats apply, see below] taxed at 25% rather than your top band slice. If you are in the 35% bracket, this is a big savings. If you are in the 28% bracket, it's a small savings. If you are in the 15% bracket, you will pay 15% (not 25%) and have no tax savings.

3) In the interim, you have postponed your tax from a high tax year to a lower tax year, allowing your money to work for you rather than having been paid to the tax man upfront. Thus you have the benefit of many years capital growth on the money.

4) Of course, if this is depreciation on a rental property and your taxes are already in the 15% bracket or lower, then you probably don't need or want accelerated depreciation because then you would be postponing from a low tax year to a high tax year. That's not very bright tax planning! You should plan this carefully with your accountant each year.

Caveat: the addback is subject to lots of tricky rules and regs. The rule above is a general idea of how it works, the actual particulars will of course vary depending on the type of asset, the length of time held, and so forth.

Answer 2

If the tax rates stay the same then there is no difference in taxes paid. You can't depreciate more value, you can just depreciate it earlier. However, if the go up in the future you may pay less taxes over the asset's life.

Answer 3

Accelerated depreciation does not change the total depreciation over the assets life. If the tax rate remains the same, the lifetime tax reduction is the same as straight-line depreciation.

Answer 4

Depends on the tax rates in the specific country. Ideally you want to claim as much as possible early, as you never know what wil happen in a few years, so if you can claim accelerated depcreciation, do so... If you're however on a marginal tax rate, it may be best to claim standard depreciation, to ensure that you don't move into a higher tax bracket in any of the years affected.