Question

Assuming the straight line method yields the true economic depreciation what is the advantages of being able to use MACRS for income tax determinations? Why are tax effects important in deciding whether this is a good investment?

Answer 1

The MACRS depreciation method gives higher depreciation value per year in the initial years than later years where in straight line depreciation it is same for all years throughout the life of the asset. In MACRS method the taxable income is less for initial years and it increases in later years This gives higher earnings in initial life of asset and decreases as life of asset increases. This method is used for tax reporting purpose and not financial reporting purpose. Tax effects are important in good investment as minimizing taxes gives better value for the investment and makes the decision strong to invest