Question

Explain why depreciation for income tax purposes is an important concern of taxpayers.

Answer 1

Depreciation is an non-cash expenses which are deductible as operating expenses in income statement. It means depreciation expenses is an expenses which are deductible for income tax purpose but in reality there is no cash outflow of this expenses.

Ex. If there is an Depreciation expenses is $ 10,000 and income tax rate Is 30% so there is tax saving of $ 3,000 ($ 10,000 X 30%). So in real term there is no cash outflow of $ 10,000 but there is tax saving of $ 3,000.

So Depreciation expenses is always important for taxpayers because this will save the cash outflow of the organization.