Dynamic tax depreciation strategies

Dynamic tax depreciation strategies

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Article ID: iaor20113419
Volume: 33
Issue: 2
Start Page Number: 419
End Page Number: 444
Publication Date: Apr 2011
Journal: OR Spectrum
Authors: ,
Keywords: programming: dynamic
Abstract:

The tax depreciation decision potentially has significant impact on the profitability of firms and projects. Indeed, the depreciation method chosen for tax purposes affects the timing of tax payments, and, as a consequence, it also affects the after‐tax net present value of investment projects. Previous research focusses on the optimal choice of depreciation method under the assumption that the depreciation method has to be set ex ante and cannot be changed during the useful life of the asset. However, several countries allow changes of depreciation method under certain circumstances. This paper develops a dynamic programming approach to determine the firm’s optimal choice with regard to the initial depreciation method, and whether changes of method are proposed in later periods.

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