Optimal tax depreciation with uncertain future cash-flows

Optimal tax depreciation with uncertain future cash-flows

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Article ID: iaor20021249
Country: Netherlands
Volume: 132
Issue: 1
Start Page Number: 197
End Page Number: 209
Publication Date: Jul 2001
Journal: European Journal of Operational Research
Authors: , ,
Keywords: taxation
Abstract:

Since taxable income consists of cash-flows reduced with depreciation charges, the choice of the depreciation method affects taxable income in future periods. A manager can therefore try to minimize the present value of future tax payments by choosing a particular depreciation method among those that are accepted by the tax authorities. We focus here on the choice between the two most commonly used methods in practice, i.e. the straight line depreciation method (SDM) and an accelerated depreciation method (ADM), such as the double declining balance (DDB) method and the sum of the years–digits (SYD) method. We show how the optimal choice depends on the discount factor, the degree of uncertainty in future cash-flows, and the structure of the tax system.

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