Презентация на тему Depreciation and Income Taxes

concepts and mechanics of depreciation and depletion, some historical

firm. A financial statement (or financial report) is a formal record of

net worth at a single point in time or

a business owns or controls (e.g. cash, inventory, plant

Statement reports the company's financial performance in terms of

two elements:
Income: What the business has earned over a

item or product are classified as:
Direct labor
Direct material
Manufacturing cost
Administrative

to a product
Measured as the sum of charges for

bonuses as well as labor connected to inspection, cleaning…)
Indirect

clerical personnel, office space, traveling, auditing, necessary to direct

or depreciate
Physical loss
Use related
Time related
Functional loss
Efficiency (technology) related
Demand (changing

of time and use
Accounting concept establishing annual deduction against

in business or held to produce income
have a determinable

personal property - includes assets such as machinery,

is placed in service for use in business or

classical (historical) depreciation method equations:

N = depreciable life of

asset can be sold for
Book value
The depreciated value

value at the end of period t
Dt = depreciation

and paper
Copying (Xerox) machines
Ink and paper are used up

only slowly over time:
Treated as “capital goods”
When company buys

recapture:
Item selling price greater than book value
(Up to purchase

out of business and sell my tools for $40K.

to P - SV
Example:
If P = $35K and I

a tax deduction) in computation of income taxes
It is

value!
Different types of assets have:
Different recovery periods
(Only partially

(DB)

Double Declining Balance (DDB)

There are more schedules used

of an asset
Graphically: straight line between the first

0

8

200

800

Years

Book Value ($)

for all years!)
It depreciates (1/n)% each year
SL Depreciation =

depreciation for period t
P: purchase value
SV: salvage value
N: useful

$7000 each. Past records indicate that they should have

/ 5 = $1400

BV(3) = 7000 – 3 [7000

20 years
(based on estimated life)
Estimated salvage value $3,500
Depreciation

1st cost – (SL Deprec)*n

value is considered:
Only estimated!
Actual (future) salvage value is not

Matheson formula: assumes that the annual cost of depreciation

× (P- D(1)) = P(1-d) × d
D(3) = d

P(1-d)t-1 × d

Ddb (t) = BVdb(t - 1) ×

of 40% for declining-balance method. Consider the previous example

balance is double declining balance or 200% declining balance

tool
d = 2/20 years
= 10% per year (or

Desirable Time
Since DDB does not use a value for

= 1/5
a (DDB rate) = (200%) (SL rate)

Depreciation Base $10,000
Salvage Value 0
Depreciation 200% DB
Depreciable life 5 years

switching, we have not depreciated the entire cost of

Case 1: S = 0

not permit us to depreciate assets below
their salvage values.

DB but with decreasing depreciation rate.
Charges a larger fraction

where SYD=N(N+1)/2

$2,000
0
0 1

Total depreciation at end of life

P = $10,000
N = 5 years
S = $2,000
SOYD = 15

n

a non time-phased fashion (decrease in value of property

in a business has a basis of $50.000 and

factor depletion
Percentage depletion

basis
Per unit amount is determined by dividing the basis

estimated 1,000,000 barrels of oil, and requires an initial

using the statutory percentage rate for the type of

example that the price for oil is $23 per

$1,150,000
Less expenses =

Before-tax cash flows
Taxable income
Income taxes
After-tax cash flow
We will

(ROR)
Tax deduction
Tax credit
Capital gain/loss
Charity deductions
Bonds
Examples

“expense” we can use that expense to reduce our

receipts
Net income = revenue minus expenses

Corporate tax is on

flows (BTCF)
Determine taxable income (TI):
Revenues – (depreciation & other

SV=0, tax=40%

sale proceeds are not revenue!
Just convert cash assets into

for 10 years:
No salvage value
Straight-line depreciation
Savings of $32K per

income = income - depreciation
Depreciation is treated as an

IRR go up or down?
I am extending the depreciation

before taxes,
12.9% after taxes
25 year (SL) depreciation schedule:
After-tax

for 4 years
Followed by straight line for 3 years
What

for after-tax cash flow (just that column!)
Calculate IRR as

accounting means of measuring a firm’s profitability based on

Evaluation?
Example: Both companies (A & B) have the same

= Net income + non-cash expense (depreciation)

x (tax rate)
Savings are not equal to deductions, just

non-depreciable assets)
Depreciated value
(for physical assets, patents, other depreciable assets)

recapture:
Item selling price greater than book value
(Up to purchase

gains (> 1 year)
Can be taxed less than ordinary

volatile
E.g., oil prospecting!
Some years may have net losses
Can use

years:
No salvage value
Straight-line depreciation

$22K
Depreciation recapture = $8K
Sell for $20K in year 8:
Capital

for $130K:
Capital gain = $20K
Sell for $100K:
Capital loss =

or receipts)
Minus operating expenses
Minus depreciation
Plus depreciation recapture
Plus capital gains
Minus

exempt income
(E.g., government bonds)
Tax deductions
(E.g., charitable donations, interest

at 11%:
$550/year, paid as $275 every 6 months
Municipal bond

$275 every 6 months
Tax = ($550) x (33.8%) =

higher income than a private 11% bond!
Desirability will vary

= 38.4%
Charitable gift of $1000:
Tax deduction = ($1000) x

is not constant:
“Graduated” income tax

+ 25% of amount above $50K
If taxable income between

$58,000

Gross Sales revenue

of goods sold) $840,000
(depreciation) $58,000
(leasing expense)

tax rate:
Tax rate that is applied to the last

Example - Corporate Income Taxes

rate
15%
25%
34%
39%
34%
35%
38%
35%

Tax computation
$0 + 0.15(Δ)
$7,500 + 0.25 (Δ)
$13,750 + 0.34(Δ)
$22,250

(Δ) denotes the taxable income in excess of the lower bound of each tax bracket

Taxable Income of $16,000,000

Used in Economic Analysis?

17.86%

0.25($5,000/$20,000) + 0.34($15,000/$20,000) = 31.75%