Tax Depreciation Research Articles

Accelerated Depreciation, Default Risk and Investment Decisions

In this article we focus on a representative firm that can decide when to invest under default risk. On the one hand, this firm can benefit from generous tax depreciation allowances, on the other hand it faces a default risk. Our aim is to study the effects of tax depreciation allowances in a risky environment. As will be shown in our numerical analysis, generous tax depreciation allowances lead to a decrease in a firm’s leverage and, in most cases, cause a reduction in default risk. This result has a strong policy implication, in that it shows that an investment stimulus pack is expected neither to increase the default risk nor to cause financial instability.

Domestic Taxes and Inbound Acquisitions

US corporations face higher tax burdens than those in many other countries, potentially influencing merger and acquisition activity. A theoretical model of this process yields two testable implications: that, relative to high-tax domestic bidders, low-tax foreign bidders will specialize in both high profitability target firms and those with few tax deductions. I find support for both effects in the US acquisition market using cross-sectional variation in target profitability and industry-level variation in deductions from bonus depreciation tax reform. Counterfactual simulations show that this reform induced a large drop in foreign acquisitions and a significant loss of aggregate wealth.

Options for Corporate Capital Cost Recovery: Tax Rates and Depreciation

The way the US corporate tax code requires capital expenditures to be depreciated is highly distortionary and raises the cost of capital investments. Depreciation?the process of writing off capital purchases over time?has received attention because it is the largest corporate tax expenditure in the United States. Requiring capital assets to be depreciated lowers the return to capital investments, creates disparate effective tax rates on similar activities, and signals that the tax code is open to special-interest tailoring. The tax code is often manipulated by arbitrarily shortening depreciation timelines through accelerated depreciation or bonus expensing. As a solution to the current inequity and inefficiency of depreciation policies, this paper advocates full expensing. Expensing incentivizes investment by allowing businesses to write off all expenditures in the year they occur, resulting in a zero effective tax rate on equity-financed capital.

An Analysis of the Gap between Accounting Depreciation and Tax Capital Allowance in Malaysia

Malaysian tax system includes a tax depreciation rule separate from accounting depreciation. This paper is to compares and contrasts the accounting treatment of depreciation and the tax treatment of capital allowance. The gap between the accounting and tax is resulted from different definitions of capital expenditure and qualifying asset and also different deduction rate and useful life used in calculating depreciation. This paper proposes the government to revise the current capital allowance system.

Tax Equity and Accounting Considerations in the Solar ABS Structure

In both residential and commercial/industrial solar finance structures, tax equity usually occupies a significant portion of the capital stack. By definition, tax equity is usually provided by large financial institutions or operating companies with sufficient tax exposure to utilize the investment tax credits, depreciation, and other tax benefits that compose their overall yield. In order to realize the tax benefits from solar projects, tax equity investors must have either a real or deemed ownership interest in the assets generating the investment tax credit and depreciation, and they usually acquire this in the form of participation in a partnership or limited liability company taxed as a partnership for federal income tax purposes. Tax equity investment structures generally take one of three forms: the partnership flip structure, the inverted lease or lease pass-through structure, or the sale-leaseback structure. As long as tax equity is a significant component of the capital structure of solar development financing, it will cause a significant headwind for efforts to provide liquidity to the solar sector through securitization. In addition to the potential tax consequences for the tax equity investors of securitization, consideration should also be given to the accounting treatment of the three predominant tax equity structures and to the impact on such structures of a securitization transaction. Because most of the significant providers of tax equity are public financial institutions or operating companies, accounting results can be not only relevant but also determinative with respect to their willingness to permit a securitization transaction to occur.

Investment Decisions and Depreciation Choices Under a Discretionary Tax Depreciation Rule

Prior studies have shown limited impact of the US bonus depreciation rules on firm investments during economic downturns. In this article we study the effects of a set of more flexible rules – discretionary tax depreciation (DTD) – introduced in the Netherlands during the 2009-2011 economic crisis. Our simulation results show DTD, which allows firms to accelerate and also to postpone depreciation, to be much more effective than bonus depreciation in reducing the expected value of tax payments, especially in crisis periods. Using a sample of 325 clients of a single office of a Dutch accounting firm, we show that DTD has led to higher investments in assets qualifying for discretionary depreciation without crowding out investments in non-qualifying assets. Our analysis on the actual depreciation choices reveals that firms postpone depreciation when facing losses or loss carryforwards, or to smooth taxable income under the progressive tax system. Our results suggest that a fiscal policy that permits firms to postpone depreciation, as well as to accelerate, may stimulate investment.

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.

State Financial Transfers in Environmental Protection: The Case of Vietnam

This paper examines the practice and the effectiveness of the instrument of state financial transfers to the business sector in the implementation of investment in the field of environmental protection through Environment Protection Funds. Focusing on the case of Vietnam Environment Protection Fund, we found that the instrument of state financial transfers including grants, soft loans, accelerated depreciation allowances, tax incentives, and subsidies have propensity for lack of effectiveness due to creating insufficient incentives and increasing burden on the State budget. The application of market-based instruments is more effective but in Vietnam the rate of this figure is only 1% for market-based instruments while most of its budget (99%) spends on soft loans projects. Therefore, the recommendations are proposed to reduce the instruments of state financial transfers and foster use of market-based instruments in environmental protection activities for the sustainable development.

DAŇOVÉ ODPISY HMOTNÉHO MAJETKU V ČR - VÝVOJ ÚPRAVY DE LEGE LATA OD ROKU 1990

The purpose of the paper is to describe development in de lege lata regulation of the tangible assets tax depreciation in the Czech Republic. The period under consideration was that since 1990. For the period 1990–2009 the legal state valid and operative as of December 31st of the relevant year and in case of the year 2010 as of the state valid and operative as of June 30th were taken into account. To obtain information on relevant de lege lata regulation, the computerized system of legal information ASPI was used. The results of carried out comparison are presented above all in tables and connected commentaries.Even if the attention was paid only to one main selected category of property, it was necessary to approach to a description and assessment of only selected changes because of the extensiveness of the issue in focus. At the very beginning, the paper deals with the specification of the basic legal principles governing the Czech law. Subsequently the paper gives a description of the legal regulation valid and operative until 31st December 1992 and the way of transformation to new rules stated in the Act No. 586/1992 Coll., on Income Taxes, as amended. Since 1993, this Act on Income Taxes has represented the basic legal standard regulating among others the issue of property depreciation. In relation to regulations stated in this Act, the attention is paid to the development in selected aspects. Namely the depreciable period, number of depreciation categories, determination of depreciable tangible property according to Section 26 of the Act on Income Taxes, depreciation rates and coefficients are involved. Besides, the paper follows also the main means of tax liability optimization due the course of the period under consideration. After consideration of acquired results, one can observe that the most changes were realized on the level of relevant provisions of the Act on Income Taxes during the nineties of the last century. When speaking of present legal regulation, this one can be assessed as a relatively steady in relation to followed provisions of the Act on Income Taxes. In general, the trend can be assessed, from the tax-payers point of view, as a positive one. However, taking account of this conclusion, it is to stress that the paper is dealing only with a part of the issue of tangible property depreciation. For deeper analysis it seems to be useful to include other aspects, such as e. g. assessment of impact of changes in legal regulations in question on the tax base.

Vestiges of British, German and Polish tax depreciation and amortization regulations in IFRS financial statements

The article compares accounting estimates in IFRS financial statements of manufacturing companies. It shows that after adopting IFRS nation-specific assumptions remained. In all analysed countries there was a tendency to use policies that were based on national laws. The borrowing of laws was more visible in Poland and Germany than in the UK. The accounting policies of companies were mostly based on national tax and accounting laws. When making subjective decisions concerning accounting policies companies tended to base their choice on national law regulations.(original abstract)

The 'Depreciation Capital-Allowance Transform' (D-CAT) Model: Decomposing the Divergence between Accounting Depreciation and Tax Depreciation

I present a mathematical model that directly links Accounting Depreciation and Capital Allowance (Tax Depreciation), describing the numerical process in which the former can be transformed into the latter. Applying this model to Deferred Taxation, I propose that the “movement of temporary difference” (arising from the divergence between Depreciation and Capital Allowance) can be decomposed and explained as the interaction of the following 3 effects: (1) “Rate” effect – different rates between Accounting and Tax Depreciation(2) “Initial Allowance” effect – Initial Allowance occurs only under Tax Depreciation but is absent from Accounting Depreciation(3) “Asset Exclusion” effect – different asset stream from which Accounting and Tax Depreciation is computed.The D-CAT model may find use as a numerical predictor of Tax Depreciation, as a teaching tool to better understand the differences between Accounting and Tax Depreciation, and as a theoretical framework for understanding the components of the specific temporary differences (for deferred tax purposes) arising from Property, Plant and Equipment. A practical application of the above is Attribution Analysis where the component effects are quantified to identify the dominant component for monitoring, for research modeling or possibly for heightening financial reporting.The D-CAT model has been developed within the framework of Malaysia’s income tax laws and Malaysian accounting standards. Since the latter is closely alignment with global practices, it is envisaged that the model can be adapted internationally to any accounting and tax framework based on Straight-Line method of Accounting Depreciation and Tax Depreciation (with or without an Initial Allowance).

Intangible asset tax depreciation in the Czech Republic

This paper aims to familiarize readers with the legislative development of intangible asset tax depreciation in the Czech Republic since 1993. The paper is divided into several basic chapters, of which the main chapter describes and analyzes the development of legislation in three thus-existing legal modes regulating intangible asset tax depreciation (the periods 1993–2000; 2001–2004; 2004–2011). A separate sub-chapter deals with each of these three modes, which fundamentally differ in the concept of determining tax depreciations. For better clarity, changes in the legislation in question are described using tables. Over the first mentioned mode, i.e. the mode valid for assets acquired in the period 1993–2000, intangible asset tax depreciations were determined by the same manner as tangible asset tax depreciations. This period is characterized by gradual establishment (specification) of legislation that may be partially attributed to the stormy development of social conditions and the need for them to be reflected in law. For the period 2001–2003, standard amendments were contained in accounting regulations. The Income Tax Act (hereinafter ITA) did not contain an amendment of intangible assets and its depreciations. It merely determined that accounting depreciations of intangible assets were a tax expense. Nevertheless, changes also occurred in this short time period, which this paper will later address. Effective from 2004, legislation on intangible assets and their tax depreciations returned to the ITA. Changes came in this mode of determining depreciations as well; nevertheless, one may consider the current legislative regulation to be stabilized. Later in this paper for the selected category of intangible assets (software), the authors describe and assess the dependence of the portion of the entry price entering tax expenses in the form of tax depreciations on the year of acquiring intangible assets. To achieve the stated objectives, the comparative method was applied (used mainly to describe and assess how legislation developed) and the modeling method (establishing models describing the impact of legislative regulation on the tax expenses of taxpayers). When elaborating this paper, the authors also chose to use so-called paired logic methods.

Tax Incentives and Business Investment: Evidence from German Bonus Depreciation

In this paper, we use an exogenous variation in tax regulations to analyze the impact of bonus depreciation programs on business investment. To promote economic convergence of Eastern and Western Germany after reunification, bonus depreciation tax incentives were granted for investments in Eastern Germany before 1999. Using business establishments in Western Germany as control group, we address the question if and to what extent these investment tax incentives boosted investment. In line with the theoretical literature, there is empirical evidence for strong and significant effects of the bonus depreciation program. The effects were stronger for long-lived capital goods, large businesses, and investments before the tax incentives were cut back in 1997. Moreover, there was a significant reduction in building investment in the year after the expiration of the program. This provides evidence for a ‘shifting’ of investment between periods with higher and lower benefits.

Analysis of the asset replacement level with an uncertain salvage value: a two-factor model

The aim of this article is to analyse the asset replacement problem from the perspective of optimal replacement level, given a specific tax environment and depreciation policy. Using a real options approach, our model minimizes current operation and maintenance costs and allows the definition of a new value of the replacement flexibility within a multi-cycle environment. The innovation on the valuation process comes from adding an autonomous salvage value’s factor. The results from partial differential equations reveal relevant differences from those observed in one-factor models, especially with regard to optimal replacement levels and in the non-monotonous effects of salvage value variation. The numerical case study also confirms that the salvage value is indeed a worthwhile element in the replacement process. It was possible to determine that, in terms of the magnitude of the cost replacement level, the key roles are played by changes in the speed of mean reversion, as well in the salvage factor volatility. This paper provides some improvements to the existing literature in equivalent annual cost by drawing up a cost minimization problem conditioned by a different salvage value dynamics, and contributes to real options literature by introducing a salvage value factor in the pricing model.

Measurement and Tax Depreciation Policy: The Case of Short-Term Assets

Depreciation is difficult and expensive to measure yet central to measuring capital income. This paper considers whether measurement resources should be allocated to longer-term assets on the theory that depreciation matters more for long-term than for short-term assets. This paper argues that accuracy in depreciation is equally or more important for short-term as for long-term assets. Nevertheless, measurement costs are likely to be higher for short-term assets than for long-term assets, which means we might expect less accuracy, all else equal, for short-term assets.

The Influence of Attraction and Company Values on Aggressive Corporate Tax Decision-Making

Little research has been published examining what influences tax decision-making within the corporate environment. What influences corporate tax decisions is an important issue because corporations account for 15.3 percent of the total gross tax collections and $67 billion of the tax gap. Additionally, based on anecdotal and survey evidence, pressure is being applied to tax personnel to be tax aggressive by senior management not associated with the tax department. This exploratory study identifies two factors that impact tax aggressiveness: 1) company values and 2) the individual's attraction to those values. Eighty-eight experienced MBA students are given an instrument describing a hypothetical situation involving tax depreciation and are asked whether they would recommend the asset be classified as a fixture or structural component to a colleague. The company's values are described as either aggressive or nonaggressive. The results indicate that the interaction between the individual’s level of attraction to the organization and the company values is significant. In particular, individuals with higher attraction to aggressive company values make the most aggressive tax recommendations while those with higher attraction to nonaggressive company values make the least aggressive tax recommendations.

Inflation Expectations, Business Taxation And The Incentive To Invest In Depreciable Capital Goods

A parochial issue in business taxation - one which was discussed vigorously during the U.S. 2007-2009 economic contraction is the issue of how corporate Federal income tax policy affects incentives for businesses to undertake new investments in capital goods. This paper focuses on the question of how the tax treatment of depreciation affects the incentives of business to invest in capital goods when businesses (rightly or wrongly) expect significant inflation during the depreciable life of the investment. An innovative idea of adjusting the system of tax depreciation for inflation is to allow an immediate deduction for the present value of the future economic depreciation that firms could claim if there were zero inflation. No adjustment for inflation would ever be needed because the depreciation charge would be taken in the same year in which the asset was purchased. The result of this approach is consistent with the result for inflation-adjusted historical cost depreciation because gains from changes in the relative prices of depreciable assets would be included in income.

The effect of tax depreciation on the stochastic replacement policy

The optimal replacement policy for an asset subject to a stochastic deteriorating operating cost is determined for three different tax depreciation schedules and a known re-investment cost, as the solution to a two-factor model using a quasi-analytical method. We find that tax depreciation exerts a critical influence over the replacement policy by lowering the operating cost thresholds. Although typically a decline in the corporate tax rate, increase in any initial capital allowance, or decrease in the depreciation lifetime (increase in depreciation rate) results in a lower operating cost threshold which justifies replacing older equipment, these results are not universal, and indeed for younger age assets the result may be the opposite. An accelerating depreciation schedule may incentivize early replacement in a deterministic context, but not necessarily for an environment of uncertainty.

Laffer strikes again: Dynamic scoring of capital taxes

We set up a neoclassical growth model extended by a corporate sector, an investment and finance decision of firms, and a set of taxes on capital income. We provide analytical dynamic scoring of taxes on corporate income, dividends, capital gains, other private capital income, and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium. We then calibrate the model for the US and explore quantitatively the revenue effects from capital taxation. We take adjustment dynamics after a tax change explicitly into account and compare with steady-state effects. We find, among other results, a self-financing degree of corporate tax cuts of about 70–90% and a very flat Laffer curve for all capital taxes as well as for tax depreciation allowances. Results are strongest for the tax on capital gains. The model predicts for the US that total tax revenue increases by about 0.3–1.2% after abolishment of the tax.

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.