Question

Plaxo Corporation has a tax rate of 35% and uses the straight-line method of depreciation for its equipment, which has a useful life of four years. Tax legislation requires the company to depreciate this type of equipment using the following schedule: year 1 - 50%, year 2 - 30%, year 3 - 15% and year 4 - 5%. In 2011 Plaxo purchases a piece of equipment with a four-year life and an original cost of $100,000. Discuss how this transaction will affect Plaxo’s income taxes in 2011.

Answer 1

answer : As the company use straight line ,method of depreciation , equipment will depericiate by 25000 in 2011 but the tax authority wants to depreciate the equipment by 50% that is by 50,000 this will impact the income hence also the taxable income that is Plaxo is supposed to give less tax to tax authority . By the method of tax authority tax benefit is given In early as the large amount is deducted from the income but In the later years tax benefit will not given as much compare to early year