Accelerated Depreciation

Accelerated depreciation is used for accounting or income tax purposes that allow greater deductions in the earlier years of the life of an asset. The major benefit of using this method is the tax shield it provides. Companies with a large tax burden might like to use the accelerated-depreciation method, even if it reduces the income shown on the financial statement.

Companies that have used accelerated depreciation will declare fewer earnings in the beginning years and will seem more profitable in the later years. Companies that will be raising financing are more likely to use accelerated depreciation in the first years of operation and raise financing in the later years to create the illusion of increased profitability (and therefore higher valuation). The two most common accelerated-depreciation methods are the sum-of-year (SYD) method and double-declining-balance method (DDB).