In Chapter 9 you learned about long-lived assets and depreciation. Currently, ac
ID: 2590291 • Letter: I
Question
In Chapter 9 you learned about long-lived assets and depreciation. Currently, according to GAAP, when a business purchases a plant asset, the cost must be allocated (depreciated) over the asset's useful life, which in many cases is several years. One of the current federal tax law changes being proposed is to allow businesses to expense the entire cost of the purchase of a plant asset in the year the asset is purchased. This would go directly against GAAP. Is this a good idea or a bad idea? What are the pros and cons of this proposal and ultimately, do you agree or disagree with this proposal and why? Please use facts and cite all sources used to justify your responses to each question proposed. Make sure you answer all questions thoroughly.
Explanation / Answer
1) Depreciating fully on the year purchase for the purpose of tax computation is good idea for business houses.
2) The pros are:
It will reduce tax burden in the current year.
When we calculate the time value of money, will be good for investors as the huge amount of tax savings in the initial year is always better than later years.
Cons:
Taxable income in the year of purchase will be lower or shall be negative.
At later years the taxable profit will be higher.
During the year of purchase the asset will not be normally put to use and hence the benefits out of the asset also may not be visible in the year of purchase, at the same time huge depreciation cost will reduce the taxable profit in the year of purchase is not justified.
3) I fully agree with the propossal.