How does depreciation affect taxable income?

How does depreciation affect taxable income?

• A. Depreciation reduces taxable income by allocating the cost of an asset over its useful life
• B. Depreciation increases taxable income
• C. Depreciation has no tax effect
• D. Depreciation reduces tax credits

Answer: (A)

Depreciation reduces taxable income by allocating the cost of an asset over its useful life. Because depreciation is treated as a deductible expense for tax purposes, it lowers the amount of income subject to tax in the year it’s claimed. Since taxes are calculated on taxable income, this deduction reduces the tax bill by the depreciation amount times the taxpayer’s marginal tax rate. It’s a non-cash deduction—you don’t actually spend cash when recording depreciation, but it still lowers tax liability. Different depreciation methods determine how much you can deduct each year, affecting the timing of the tax benefits. It does not reduce tax credits, and it does not increase taxable income.

Depreciation reduces taxable income by allocating the cost of an asset over its useful life. Because depreciation is treated as a deductible expense for tax purposes, it lowers the amount of income subject to tax in the year it’s claimed. Since taxes are calculated on taxable income, this deduction reduces the tax bill by the depreciation amount times the taxpayer’s marginal tax rate. It’s a non-cash deduction—you don’t actually spend cash when recording depreciation, but it still lowers tax liability. Different depreciation methods determine how much you can deduct each year, affecting the timing of the tax benefits. It does not reduce tax credits, and it does not increase taxable income.