Structure Thus, the presence of depreciation allowances lowers the effective price of acquiring durable assets from sq to $(1- 4)q Tax savings depends on value of T and the function D(n, Tax benefits are more valuable the lower t is and the more front-loaded D(n) is
11 Structure • Thus, the presence of depreciation allowances lowers the effective price of acquiring durable assets from $q to $(1- Ψ)q. • Tax savings depends on value of T and the function D(n). – Tax benefits are more valuable the lower T is, and the more front-loaded D(n) is
Structure Accelerated depreciation is a scheme to write off assets faster than true economic depreciation Expensing allows a firm to deduct from current taxable income the assets full cost at the time of acquisition 12
12 Structure • Accelerated depreciation is a scheme to write off assets faster than true economic depreciation. • Expensing allows a firm to deduct from current taxable income the asset’s full cost at the time of acquisition
Structure Under current law, T varies from 3 to 39 years Racehorses are depreciated over 3 years Computers are depreciated over 5 years Nonresidential structures are depreciated over 31.5 years Generally tax lives are shorter than actual useful lives 13
13 Structure • Under current law, T varies from 3 to 39 years. – Racehorses are depreciated over 3 years – Computers are depreciated over 5 years – Nonresidential structures are depreciated over 31.5 years • Generally tax lives are shorter than actual useful lives
Structure Intangible assets- some spending such as an advertising campaign, may increase sales over a number of years Computing appropriate depreciation is difficult 14
14 Structure • Intangible assets – some spending, such as an advertising campaign, may increase sales over a number of years. – Computing appropriate depreciation is difficult
Structure No Investment Tax Credit(ITC) Prior to 1986, ITC permitted a firm to subtract some portion of the purchase price of an asset from its tax liability at the time the asset was acquired ITC did not depend on corporate tax rate(in contrast to depreciation allowances) Subtracted directly from tax liability, not taxable income 15
15 Structure • No Investment Tax Credit (ITC) – Prior to 1986, ITC permitted a firm to subtract some portion of the purchase price of an asset from its tax liability at the time the asset was acquired. – ITC did not depend on corporate tax rate (in contrast to depreciation allowances) – Subtracted directly from tax liability, not taxable income