Which one of the following statements regarding depreciation is correct?
A) The depreciation tax shield adjusts annually with the level of inflation.
B) The real amount of annual depreciation is fixed, thus the higher the rate of inflation, the higher the depreciation tax shield.
C) Tax law allows accelerated depreciation to be used for tax purposes.
D) MACRS can be used for accounting purposes but not for tax purposes.

Question

Quizplus · Accepted Answer

Tax law allows for accelerated depreciation to be used for tax purposes, which means that companies can take larger depreciation deductions in the earlier years of an asset's life. This can provide a larger tax shield in the earlier years, reducing taxable income and resulting in lower tax payments. MACRS (Modified Accelerated Cost Recovery System) is a specific method of accelerated depreciation that is used for tax purposes. Option A is incorrect because the depreciation tax shield doesn't adjust annually with inflation. Option B is incorrect because the real amount of annual depreciation can be affected by the rate of inflation, but the depreciation tax shield is based on the amount of depreciation claimed for tax purposes. Option D is incorrect because MACRS is specifically designed for tax purposes.

Which One of the Following Statements Regarding Depreciation Is Correct