How to Reduce Depreciation & Amortization Expense

Accrual accounting is different from cash accounting in that accrual accounting provides ways to record a transaction with no real cash exchange. Depreciation and amortization are two examples of non-cash transactions; that is, no cash really exchanges hands. Instead, the initial expense of the equipment is capitalized and written off every year. In accrual accounting, this falls under the "matching principal." Reducing depreciation and amortization is therefore more about changing the depreciation methodology or the strategy for purchasing capital expenditures rather than actually reducing the amount of depreciation expensed. This is a strategic decision, as it can influence your rate of growth.

Determine the type of depreciation methodology used. There are several types of methodologies used: The easiest method is the "straight-line" method. It is used to write off equal parts of the asset value over the life of the asset. Some methods accelerate the rate of depreciation in the early years of the asset's life, while others push depreciation off until the latter years of an asset's life.

Determine if it's more important to want results now or in the future. If you currently use a straight line depreciation methodology (equal parts), then accelerating depreciation expense in the early years would lower depreciation for the latter years, and vice-versa.

Increase the number of years in the asset's useful life. This will spread costs over a longer period of time and reduce yearly expenses associated with depreciation and amortization.

Increase the salvage value. Using straight line depreciation you can increase the expected salvage value of the equipment. This will reduce the amount being spread across years. The equation for annual depreciation expense for straight line depreciation is Depreciation Expense = (Purchase Price - Salvage Value) / Useful Years.

Cut back on capital expenditures (capex) budget. This will directly affect your growth projections, however.

Warnings

  • Always consult a CPA for guidance on your specific organization or business. Due to the ability for companies to report higher income with lower depreciation and amortization expense, the IRS does not support changing depreciation methodologies solely for tax purposes. If you do change your depreciation methodology, you must report it to the IRS immediately.

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About the Author

Working as a full-time freelance writer/editor for the past two years, Bradley James Bryant has over 1500 publications on eHow, LIVESTRONG.com and other sites. She has worked for JPMorganChase, SunTrust Investment Bank, Intel Corporation and Harvard University. Bryant has a Master of Business Administration with a concentration in finance from Florida A&M University.