Depreciation Tax Shields Research Articles

Investment and depreciation tax shield under spatial competition: The case of the Greek hotel sector

Investment and depreciation tax shield under spatial competition: The case of the Greek hotel sector

Tax Shield and Firms Value of Quoted Manufacturing Companies in Nigeria

This study investigated the effect of tax shield on firms’ value of selected manufacturing companies in Nigeria from 2012 to 2021. The dependent variable of this study was firm value which was proxied by Tobins Q, while the independent variables were debt tax shield, depreciation tax shield and charitable donation tax shield. The research design adopted for the study was ex post facto, secondary data were employed, three hypotheses were tested and purposive sampling technique was used. The data for the study were analyzed using ordinary least square regression technique and the statistical tool package used was SPSS Version 20. From the result of the analysis, it was found out that debt tax shield, depreciation tax shield and charitable donation tax shield have significant effect on market value of selected manufacturing firms in Nigeria. Hence, it was concluded that tax shield could be used to optimize the value of manufacturing firms’ in Nigeria. Based on the outcome of this study, it was recommended among others that management of manufacturing firms should consider increasing debt financing, invest more in non-current asset, take advantage of charitable donation as means to enhance corporate image and maintain a proper mix of tax shield in the firm thus bringing overall benefit to shareholders and prospective investors.

The choice of capital structure: A study on energy industry in a developing country

The choice of capital structure has greatly contributed to the success of the firms in general and energy in particular. This study uses a sample data set of 250 energy firms over the period 2010-2019, and by using generalized least square (GLS) method to perform a survey. The main factors in this study include profitability, firm age, state shareholding and depreciation tax shield, etc. The study found that except firm growth, all factors including firm performance, age of firm, size of firm, asset structure, short-term solvency, and depreciation have significantly affected firm’s capital structure choice in the case of energy industry in a developing country. Furthermore, a positive effect was also found for size of firm and asset structure while a negative effect was detected for other factors such as firm performance, asset structure, firm age, short-term solvency, and depreciation. Through this research, we also conclude that the theory of pecking order, and the theory of representative cost are known as the basis for financial managers to build sound capital structures for businesses.

Tax Code Change Impacts on the Practice of Corporate Finance

Public Law No. 115-97 (initially introduced in the house as the Tax Cuts and Jobs Act or TCJA) passed by Congress in 2017 has significantly revised the Internal Revenue Code of 1986. Since taxes play an important role in financial decision-making, the TCJA will impact decisions in many areas of corporate finance, including capital structure and capital budgeting. By using S&P 500 data, this paper attempts to broadly estimate these impacts. The lower corporate tax rate under the new law reduces the corporate incentive to borrow to benefit from the interest expense tax shield. The lower tax rate also reduces the depreciation tax shield and marginally raises the average cost of capital. However, an S&P 500 firm on average will receive an estimated $239 million per year in tax-related benefits, based on 2017 financial data. This annual benefit will decrease after five years as the 100% expensing of investments is gradually withdrawn after 2023.

Capital taxation efficiency of agricultural businesses in the Slovak Republic

Effective tax rates are presented by indicators of the actual corporate tax burden, which take into account the impact of all the elements listed in the legislation. The submitted contribution explores the issue of effective taxation through effective average tax rates (EATRs) focusing on agricultural production enterprises. The analysis assessed the effect of changing the statutory tax rate (and other taxes and factors) on changing the effective average rate of capital. Taxation efficiency was monitored for selected intangible and tangible assets for 2004 and 2018. Analysis indicated a depreciation tax shield that tracked the amount of tax savings on capital investment as well as the economic rent of the project with taxation. The analysis showed that a 3% increase in the statutory rate over the reference period increased the effective average corporate rates for intangible assets by 13.35%, tangible assets by 14.25% and inventories by 16.63%. The highest annual tax saving was achieved in 2018 for tangible assets of € 4,647.50, with a four-year return.

Arguments in Favour of Tax Neutral Cost Allocation

When considering corporate taxes in a cost allocation context a trade‐off is generated for shareholders. On the one hand, accelerated depreciation increases the value of a project due to the depreciation tax shield. On the other hand, accelerated depreciation most likely does not induce robust goal congruency between managers and shareholders when utilizing residual income as an incentive system and, as a consequence, over‐ or underinvestment could result. In this context, the literature suggests the application of particular allocation rules. When extending the relative marginal benefits cost allocation rule (Reichelstein, 1997; Rogerson, 1997) to include corporate taxes we find it to be tax neutral and to maintain its properties of generating robust incentives. As a consequence the over‐/underinvestment problem is solved, but the depreciation tax shield is often not maximized. However, we illustrate that in competitive markets shareholders ought to prefer a tax neutral allocation scheme over an accelerated depreciation schedule. Thus, we show that shareholders as well as regulators have—for different reasons—a preference for tax neutral cost allocation.

Are Multinational Corporate Tax Rules as Important as Tax Rates?

Previous research has documented the influence of statutory tax rates on international firms' effective tax rates, or ETRs. We add to this body of research by examining common factors of the income tax base, which affects ETRs. Specifically, this study examines the determinants of effective tax rates for publicly traded companies based in European Union (EU) countries. The time period examined is after 2004, when all EU firms were required to use standardized accounting principles under International Financial Reporting Standards (IFRS). We find that, across EU countries, such factors are relatively consistent with factors found in studies of U.S. companies' effective tax rates, which include inventory, leverage, depreciation tax shield, and R&D intensity. We also find that the presence of country book-tax conformity rules increases effective rates. Importantly, our finding that such tax base (or rule) effects are at least as important as rate effects adds to the international debate about uneven tax structures around the globe.

Odpisy a jejich význam při hodnocení efektivnosti investic v podmínkách České republiky

Odpisy vyjadřuji trvale znehodnoceni majetku a snižuji jeho zůstatkovou cenu vykazanou v rozvaze, umožňuji postupne přeneseni výdaje na jeho pořizeni do nakladů a jsou zdrojem financovani. V teorii i praxi investicniho rozhodovani v CR je třeba od sebe odlisovat odpisy ucetni, manažerske a daňove a zohlednit při tom specifika vyplývajici z ceske ucetni a daňove legislativy. Ocekavaný peněžni tok z investice ovlivňuji odpisy nejen z nově pořizovaneho majetku, ale ve specifických připadech i odpisy z již existujiciho majetku, přestože výdaje na něj jsou již z pohledu hodnoceni efektivnosti investice utopene. Za hlavni vliv odpisů na peněžni tok z investice je možne považovat přijem v podobě odpisoveho daňoveho stitu. Soucasti investicniho rozhodovani by měl být i výběr metody daňových odpisů hmotneho majetku, ktera zabezpeci maximalizaci soucasne hodnoty odpisových daňových stitů.

Leverage, Corporate Taxes and Debt Shifting of Multinationals: The Impact of Firm-Specific Risk

Firms have the incentive to enhance debt nancing with higher corporate tax rates due to the increased value of interest deductions from the tax base. However, external debt is relatively costly for corporations with a high rm-specic risk. Moreover, for multinationals, the shifting of internal debt opens up additional tax saving opportunities. Using a large database of European multinationals for the years 1998{2006, rst, we provide evidence that the debt-to-assets ratio is positively aected by the statutory corporate tax rate. Second, we show that multinational subsidiaries use debt shifting with the parent as well as external debt to get advantage of the depreciation tax shield. Third, we provide evidence that subsidiaries with a high rm-specic risk are more involved in debt shifting

Corporate Leverage and Nondebt Tax Shields: Evidence on Crowding‐Out

AbstractA negative relationship between corporate leverage and tax shields has been predicted because a large nondebt tax shield reduces the expected value of interest tax savings and lessens the advantage of debt financing. Previous studies, however, have provided inconclusive and contradictory evidence on whether nondebt tax shields crowd‐out debt financing. The analysis herein relies on unique constructs of discounted depreciation tax shields and presents evidence that crowding‐out does not occur. Furthermore, it is shown that contradictory inferences may result from analysis of annual tax depreciation deductions instead of discounted tax shields. The findings suggest that firms with substantial cash flow from depreciation exploit their higher debt capacity by maintaining a capital structure with significantly more debt than otherwise.

Q and the tax bias theory : The role of depreciation tax shields

A growing body of literature analyzes the variation in Q, the ratio of financial market value to asset current replacement cost, and makes inferences about attributes such as monopoly power, profitability, managerial performance, etc. These studies ignore potential biases embedded in Q that result from non-neutral tax policies. This study examines the association between Q and tax biases and establishes that differences in accumulated depreciation tax shields explain significant variation in Q. The implication that Q should be adjusted for tax biases before use in empirical research is examined further. Adjusting Q for tax biases, at least with the factors herein, leads only to minor changes in econometric analyses.

An economic analysis of leasebacks

Leaseback decisions by firms involve the simultaneous sale of an asset and a lease agreement with the new owner. Examination of 64 leaseback decisions made by firms during 1979–1987 reveals a significant negative announcement effect. We present a theoretical framework in which all firms prefer to leaseback when there is symmetric information. When there is asymmetry of information between the manager and the market, however, firms with favorable prospects prefer to own the asset. Firms with poor prospects choose to leaseback and capture the associated depreciation tax shield through the sale. Our empirical results indicate that, besides the significant negative announcement effect, firms proposing a leaseback earn negative returns in the three months prior to the announcement. We monitor the performance of these firms for five years after the leaseback decision and compare it to five years before the announcement. There is a significant drop in operating performance as indicated by several key variables such as operating earnings before depreciation and pretax earnings. This is consistent with the hypothesis that firms choose to leaseback when faced with unfavorable future prospects.

Non-linearities and nominal contracting effects: The case of the depreciation tax shield

This paper shows that the effect of nominal contracting on stock returns may be more important than previously believed. When information on the maturity structure of depreciation tax shields is incorporated into tests of the nominal contracting hypothesis, nominal contracting effects that are not otherwise detectable become so. Additionally, the proportion of stock return variation explained by nominal contracting effects and the aggregate effect on stock returns of depreciation tax shield revaluations are found to be greater than previously believed.

Inflation, Uncertainty, and Investment

ABSTRACTThis paper investigates the effect of inflation on a firm's investments in fixed assets. When future prices are certain, inflation affects the present value of depreciation tax shields, and the impact of inflation on the choice between different lived assets is nonmonotonic. Future asset price uncertainty creates a valuable switching option and benefits shorter‐lived assets.

Unanticipated inflation and the value of the firm

Evidence presented here indicates that the relationship between stock returns and unexpected inflation differs systematically across firms. The differences are shown to be consistent with cross-sectional variation in firms' nominal contracts (monetary claims and depreciation tax shields). The differences are also partially explained by proxies for underlying firm characteristics that could create interaction between unexpected inflation and operating profitability. Finally, much if not most of the differences appear to arise because unexpected inflation is correlated with changes in expected aggregate real activity, the effects of which tend to vary across firms according to their systematic risk.

The Tax Effects of Inflation: Depreciation, Debt, and Miller's Equilibrium Tax Rates

Indexing historical cost accounting to has received considerable attention in the accounting literature. From a tax perspective, it is often argued that with historical cost accounting, increases effective corporate tax rates, ceteris paribus. (See Davidson and Weil [1978], Williams [1979], Bernard [1981], and Gonedes [1981].)1 A major reason is the failure of historical cost accounting to index the depreciation tax shield to inflation. But explicit indexation may not be necessary to achieve all the effects of indexation. The same effects can be attained, at least with respect to expected rates of inflation, if nominal interest rates incorporate unbiased forecasts of rates of inflation (Gonedes [1981, p. 247]).2 Davidson and Weil [1976] note that price-level adjusting the tax system would increase the depreciation tax shield, but it ... would diminish the tax-saving attribute of debt financing in a period of rising prices [1976, p. 99].

THE ECONOMIC ADVANTAGE OF THE OPTIMUM DEPRECIATION PROCEDURE*

ABSTRACTThe purpose of the research was to determine the economic advantage of the accelerated depreciation procedures allowed by Revenue Procedure 67–40. This income tax procedure allows relatively free choice of depreciation method at any point in the asset's life. This choice affects two decisions. First, the decision to acquire a particular asset and second, if acquired, the depreciation method to be used for income tax purposes.A deterministic computer simulation was used to calculate the economic advantage of the new optimum procedure compared to the sum‐of‐the‐years‐digits method. The economic advantage is measured by the present worth of the depreciation tax shield. The independent variables are cost of capital, economic life, estimated salvage value, and income tax rate.The results of the simulation show that the added economic advantage of the new optimum depreciation procedure is small and is unlikely, in practical situations, to change the acquisition decision. The desirability of the new procedure for income tax purposes if the asset is acquired is less clear because the costs of using the new procedure are difficult to measure.