If a business chooses to use the straight-line method for tax purposes rather than MACRS, how will this choice affect the amount of income taxes paid in the first year of an asset's life?
What will be an ideal response?
Answers will vary.
A company choosing the straight-line method will pay more taxes in the early years and less taxes in later years than a company choosing MACRS, depending on the useful life of the asset. A company choosing MACRS would reduce taxes in the early years of an asset's life because it would report higher depreciation charges on the tax return than in the financial statements. In later years, however, taxes will be higher because, under MACRS, the amount of depreciation declines as the asset becomes older. Taxes are delayed but not avoided.
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