Please refer to page 5 of this report for important disclosures
Special Report: September 1, 2004
Barry Ritholtz, Market Strategist
Understanding Accelerated Depreciation (part I)
One of the more important changes in tax legislation passed by President Bush is
scheduled to expire this year: Accelerated Depreciation of Capital Investment.
No one is even remotely suggesting that anyone do some thing about this sunsetting
on December 31, 2004. Nor are they likely to, for reasons that will become
abundantly clear later.
Most investors seem to understand very little about what is, at its heart, a change in
the rules governing certain accounting operations. Surprisingly, we’ve seen very little
in the way of analysis or commentary on it from the Wall Street; Nor has there been
much said in the financial press about what is essentially an intriguing corporate tax
Let’s see if we can change all that.
What is Accelerated Depreciation?
When making large capital purchases, businesses get to write them down over time,
deducting their original cost, based upon certain schedules and accounting
conventions. This is called “Depreciation.” If that word sounds familiar, it should:
Depreciation is the “D” in EBITDA (Earnings before Interest, taxes, depreciation and
For those of you whose eyes glaze over at the mere mention of accounting, consider
this: What would it be like if you could write off big-ticket purchases much faster
than your accountant was able to do historically? What would you buy if you could
deduct the lion’s share of the equipment purchase expenses in year one -- instead of
the usual seven? And this deduction covers just about everything bigger than a
Blackberry, and smaller than real estate – even a Lear jet . . .
Have I got your attention yet?
All that and more is what the accelerated depreciation of capital investments entails.
Let’s drill down into the details: Traditionally, major capital investments were
“depreciated” based upon a rough schedule of their useful expected lifespan.