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> IIRC, tax authorities carefully regulate how quickly you are allowed to depreciate. The reason is that with depreciation you reduce your profit, and pay less
by SilasX 4y ago
> IIRC, tax authorities carefully regulate how quickly you are allowed to depreciate. The reason is that with depreciation you reduce your profit, and pay less in taxes
I think that’s overstating it. You’re always going to depreciate to 100% eventually[1], so faster depreciation just means you realize a loss (and reduce the tax bill) sooner rather than later.
[1] or sell for actual value, in which case you adjust the books to the actual loss of value which may before or less than the depreciation formula estimated.
- SilasX 4y agoFollow-up: Keep in mind, the depreciation schedules can also understate how fast the good loses value. See also my lay explanation of why depreciation in tax law exists [1] and why it eventually gets resolved on sale or disposal[2]. [1] https://news.ycombinator.com/item?id=15061439 https://news.ycombinator.com/item?id=15061439 [2] https://news.ycombinator.com/item?id=26674984 https://news.ycombinator.com/item?id=26674984
- FabHK 4y agoYou're right: with all of that, you're just shifting things around in time, and it resolves when you sell the asset or toss it. This can still have real effects in times of high interest rates, or due to the fact that a loss might give you less of a tax credit, depending on jurisdiction, than a profit generates in tax obligations. Not sure how relevant it is to the issue described in the article: depreciations that are too small, thus front loading profits - but it might be that the tax code prohibits larger depreciations.
- SilasX 4y agoAren't you allowed to keep separate books for "what we think our book value should effectively be regarded as" vs "what we're required by tax law to say it is"?