Question

Do you think the tax treatment of depreciation is fair? Why or why not?

Answer 1

Yes the tax treatment of Depreciation is Fair, as explained below

Depreciation is a mandatory deduction and the Tax Act allows the deduction either under straight-line method or written down value (WDV) method. Most of the time the deduction for depreciation under the WDV method except for undertaking engaged in generation or generation and distribution of power. The Tax Act also allows a deduction for additional depreciation in the year of purchase in certain circumstances.

Depreciation is calculated on the WDV of a Block of assets. Block of assets is a group of assets falling within a class of assets comprising of:

1) Tangible assets, being building, machinery, plant or furniture.

2) Intangible assets, being know how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature.

Depreciation is the gradual charging to expense of a fixed asset's cost over its useful life. Depreciation is a method used to allocate the cost of tangible assets or fixed assets over the assets' useful life. In other words, it allocates a portion of that cost to periods in which the tangible assets helped generate revenues or sales. By charting the decrease in the value of an asset or assets, depreciation reduces the amount of taxes a company or business pays via tax deductions.

A company's depreciation expense reduces the amount of earnings on which taxes are based, thus reducing the amount of taxes owed. The larger the depreciation expense, the lower the taxable income and the lower a company's tax bill. The smaller the depreciation expense, the higher the taxable income and the higher the tax payments owed.