When a firm acquires a long-lived asset such as equipment, if the tax law allows it...
When a firm acquires a long-lived asset such as equipment, if the tax law allows it managers would generally prefer to ________.
A.
take no deduction at all for the cost of the equipment
B.
immediately take a deduction for the full cost of the asset when it is purchased
C.
depreciate the equipment over a short life
D.
depreciate the equipment over a long life
Homework Answers
B. Immediately take a deduction for the full cost of the asset when it is purchased.
Because, when tax law allows the managers would generally prefer to take the most beneficial option. When the full cost of the asset is taken as deductions immediately then the tax burden reduces by that amount of deduction.
If the same amount of asset cost is taken as deductions over short life then the tax burden reduces by the same of amount of deductions taken every year. But the total deduction can't exceed the total cost of asset that could be taken immediately in a single year. If the present value is applied the benefit of deductions over short life would be less than the benefit of single year deduction.
Taking no deduction at all is not wise selection as tax benefit is lost and depreciation over a long life is also not beneficial as the benefit over long life would be diluted.
Therefore, when there is an option to claim deduction for the total cost of asset immediately it becomes useful.
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