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Accelerated Depreciation
Take advantage of accelerated depreciation when you
purchase assets this year
Investing in your business this year will help
improve your bottom line
October 18, 2011 - Since the recession in 2008 caused by the housing bubble and the global
financing crisis the US Government has tried various stimulus packages to
attract additional corporate investment. Particularly there were a series of
what were billed as “one time” accelerated depreciation programs. These allowed
for up to 60% accelerated depreciation instead of the standard 20% straight line
depreciation method.
This new legislation is a multi-year plan that allows for 100% accelerated
depreciation in calendar 2011 then DROPS to 50% accelerated depreciation in
calendar 2012. Under the previous legislation many companies developed a “wait
and see” approach to accelerated depreciation. The current law is very specific
in that there is a 50% drop off in After Tax Savings for companies that wait to
invest until 2012.
After Tax Cash Flow Example #1: Straight Line Versus Accelerated Depreciation
Assumptions:
$1,000,000 of assets acquired and “put in service” in calendar 2011.
35% Corporate Tax Rate. While this is the most common it may vary.
| |
Straight Line Depreciation |
Accelerated Depreciation |
% Difference |
| Price |
$1,000,000 |
$1,000,000 |
0% |
| Depreciation % |
20% |
100% |
400% |
| 2011 Depreciation Expense |
$200,000 |
$1,000,000 |
400% |
| Corporate Tax Rate |
35% |
35% |
0% |
| Depreciation Tax Benefit |
$70,000 |
$350,000 |
400% |
| 2011 After Tax Cash Flow |
$930,000 |
$650,000 |
30.1% |
The after tax benefit to taking advantage of the 2011 accelerated depreciation
is $280,000 over taking straight line depreciation. This is money that goes
straight to your calendar year 2011 bottom line. In 2012 the accelerated
depreciation rate drops to 50%.
The following example illustrates the cost incurred by waiting to invest.
After Tax Cash Flow Example #2: 2011 Versus 2012 Accelerated Depreciation
Assumptions:
$1,000,000 of assets acquired and “put in service” in calendar 2011.
35% Corporate Tax Rate. While this is the most common it may vary.
| |
Straight Line Depreciation |
2011 Accelerated Depreciation |
2012 Accelerated Depreciation |
| Price |
$1,000,000 |
$1,000,000 |
$1,000,000 |
| Depreciation % |
20% |
100% |
50% |
| First Year Depreciation |
$200,000 |
$1,000,000 |
$500,000 |
| Corporate Tax Rate |
35% |
35% |
35% |
| Depreciation Tax Benefit |
$70,000 |
$350,000 |
$175,000 |
| First Year After Tax Cash Flow |
$930,000 |
$650,000 |
$825,000 |
The difference in waiting to invest until calendar 2012 is $175,000 in After Tax
Benefits. The after tax first year tax flow for the 2011 accelerated
depreciation is 30.1% more favorable than using traditional straight line
depreciation. In 2012 the accelerated depreciation is still more favorable than
straight line depreciation but only by 11.3%.
After Tax Cash Flow Example #3: Using Debt to create a Cash Positive Transaction
Assumptions:
$1,000,000 of assets acquired and “put in service” in calendar 2011.
35% Corporate Tax Rate. While this is the most common it may vary.
36 Month Capitalized Financing rate of 6.5% with a $1 buyout at term end.
Interest expense is calculated in the tax benefit column for this example.
First payment in November of 2011.
| |
2011 Acquisition via
Cash |
2011 Acquisition via
Capitalized Financing |
Difference |
| Price |
$1,000,000 |
$1,000,000 |
N/A |
| Depreciation % |
100% |
100% |
N/A |
| 2011 Depreciation Expense |
$1,000,000 |
$1,000,000 |
N/A |
| Corporate Tax Rate |
35% |
35% |
N/A |
| Term |
N/A |
36 Months |
N/A |
| Monthly Payment |
N/A |
$30,483 |
N/A |
| 2011 Payment |
$1,000,000 |
$60,966 |
$939,034 |
| Depreciation Tax Benefit |
$350,000 |
$351,894 |
0.5% |
| 2011 After tax Cash Flow |
$650,000 |
$290,928 |
$940,928 |
Utilizing Capitalized Financing in 2011 will create a situation where the after
tax benefits would greatly outweigh the payments thus creating a cash positive
transaction for calendar 2011.
This difference in cash flows for this example ($940K) would go straight to your
bottom line for paying bonuses, dividends, etc. The difference in pre tax and
after cash flows is due to the estimated interest expense for the financed
example.
About the Program
President Obama signed The Tax Relief, Unemployment Insurance Reauthorization
and Job Creation Act of 2010 in December 2010. It provides 100 percent
accelerated depreciation expense for capital investments placed in service after
September 8, 2010 through December 31, 2011. For assets placed in service after
December 31, 2011 and through December 31, 2012, the bill provides for 50
percent depreciation bonus.
This legislation is more commonly referred to as the Accelerated or Bonus
Depreciation Act. To be eligible for this accelerated depreciation assets must be acquired and
“put in service” in calendar 2011. The phrase “put in service” is somewhat vague
but it is generally accepted that the assets must be delivered and available for
productive use. Each customer must make the final determination if they meet
this requirement.
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