Accelerated depreciation is the set of IRS rules that allow businesses to deduct from their taxable income the declining value of business-related investments, such as equipment and machinery, faster than the value of those assets actually declines.
The two most common types of accelerated depreciation are sum of the years' digits and double declining balance.
- Double Declining Balance. To use it, accountants first calculate depreciation as if they were using the straight line method. They then figure out the total percentage of the asset that is depreciated the first year and double it. Each subsequent year, that same percentage is multiplied by the remaining balance to be depreciated. At some point, the value will be lower than the straight-line charge, at which point, the straight line method will be used for the remainder of the asset’s life
- Sum-Of-The-Years' Digits. This method takes the asset's expected life and adds together the digits for each year. So if the asset was expected to last for five years, the sum of the years’ digits would be obtained by adding: 5 + 4 + 3 + 2 + 1 to get a total of 15. Each digit is then divided by this sum to determine the percentage by which the asset should be depreciated each year, starting with the highest number in year 1.