Accelerated depreciation is any method of depreciation used for accounting or income tax purposes that allows greater deductions in previous years of an asset’s life. While the straight-line depreciation method distributes the cost evenly over the life of an asset, an accelerated depreciation method allows you to deduct higher expenses in the first few years after purchase and lower expenses as the depreciated item ages.
The methods of accelerated depreciation are sometimes mainly logistical. Although an asset does not need to be depreciated in the same way that it is used, an accelerated depreciation method tends to cause this to occur. This is because a feature is most used when it is new, functional and efficient. As this tends to occur early in the asset’s life, the logic behind an accelerated method of depreciation is that it corresponds appropriately to the use of the underlying asset. As an asset ages, it is not used much, as it is phased out for new assets.
Let’s take the example:
Accounting information: the equipment was acquired for 20 thousand and, consequently, recorded at historical cost. This is the value that will be shown in the plant’s fixed assets throughout its useful life, which is estimated at 5 years. For this reason, we consider the book depreciation rate of 20% per year. Note that each year the depreciation expense of 4 thousand is recorded in the accounts and it accumulates over the years until the equipment is fully depreciated at the end of the fifth year. In other words, the equipment acquired for 20 thousand at the end of the fifth year was depreciated by 20 thousand and its book value is zero.
Tax information: when calculating IRPJ and CSLL, not only the 20% of the book depreciation is considered, an additional 30% is added because the depreciation of the equipment was allowed in 2 years, which means that the equipment must be depreciated at a rate of 50 % per year.
Calculation of IRPJ and CSLL considering accelerated depreciation:in this example we put the profit amount before income tax – random LAIR, just to exemplify the calculation considering the accelerated depreciation. As the book depreciation recorded an expense of 20% and the tax depreciation uses a rate of 50%, the difference of 30% was excluded from the calculation base causing the company’s real profit (calculation base the IRPJ and CSLL) to decrease. The same procedure occurs in year 2. Thus, at the end of year 2, the equipment is totally depreciated: 40% recorded as depreciation in accounting and 60% excluded from the calculation basis. However, the asset was not fully depreciated in accounting and continues to record an expense of 20% per year. This expense has already been used to decrease the calculation basis for IRPJ and CSLL in the first two years, therefore, it should be added in years 3, 4 and 5.
Control of temporary differences: considering that accelerated depreciation is a tax transaction, the control of these temporary differences will occur in Part B of the IRPJ and CSLL. The amounts that I excluded from the calculation base in accounting for the first two years will be added to the calculation base for the last three years.
Realize that the total excluded and later added is the same. The calculation base, if added to 5 years, is the same. However, there is a reduction in the first two years and an increase in the last three years, with this, the manager gains time and money to manage the factory.