Question

Depreciation is a tough concept since there may be so many factors associated with it. The IRS changes the tax deductions given for depreciation on a regular basis. On a larger purchase the tax deduction may be significant. How much of a factor do you think depreciation should be on the decision to move forward with a project? For example, if the tax benefit is greater in the following year, should management hold off on the purchase? Do you feel that managers understand this concept well enough to include it in their decision making process?

Answer 1

Depreciation is the deduction you get in the current year even though you have not spent money to buy in that particular year only. Depreciation expenses should be taken at the end of the year to get included in the taxes.But when to take and how much depreciation for an asset is a million dollar question.The choices we have to take the depreciation all in the year of purchasing or take the depreciation on the life of an asset,and take the option of accelerating the depreciation deduction in the earlier years of purchase.When we do careful tax planning ,then it helps you to choose between the options ,which is going to benefitial .One should consult their tax professionals to determine the depreciation deduction for their project.

No, management should go with the purchase if the tax benefit is greater .

No they don't understand this concept well enough because they still lack behind in taking decisions because they are not able to take the benefits of tax deductions properly.They still need to learn the process so that proper decisions can be made on a regular basis.