Jain's Pharmaceuticals is installing new lab equipment at a cost of $5 million with an economic life of 5 years. Jain's marginal tax rate is 35%. What is the difference in tax expense in the second year if depreciation is computed using MACRS rates rather than straight line?
A) $350,000 more
B) $210,000 more
C) $350,000 less
D) $210,000 less

Question

Quizplus · Accepted Answer

Under MACRS, depreciation is accelerated, meaning more depreciation expense is taken in the early years compared to straight-line depreciation, which spreads the cost evenly over the asset's useful life. In the second year, using MACRS results in a higher depreciation expense than straight-line, reducing taxable income more and thus reducing the tax expense. The difference in tax expense due to the higher depreciation under MACRS would result in less tax being paid, hence "$210,000 less" is correct.

Jain's Pharmaceuticals Is Installing New Lab Equipment at a Cost