The annual tax depreciation expense on an asset reduces income taxes by an amount equal to
A) The firm's average tax rate, t, times the depreciation amount.
B) One minus the firm's average tax rate, t, times the depreciation amount.
C) The firm's marginal tax rate, t, times the depreciation deduction.
D) One minus the firm's marginal tax rate, t, times the depreciation amount.
E) The depreciation amount.

Question

Quizplus · Accepted Answer

The annual tax depreciation expense is deductible from taxable income, which reduces the taxes owed by a firm. Therefore, the amount of tax savings will depend on the marginal tax rate of the firm, which is the tax rate that applies to the last dollar of taxable income. Option C states that the tax savings would be equal to the depreciation deduction multiplied by the firm's marginal tax rate, which is the correct formula to calculate the tax benefit of depreciation.

The Annual Tax Depreciation Expense on an Asset Reduces Income