Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Tax Avoidance through Depreciation
Tax avoidance means taking advantage of the loops in the tax structure and laws to reduce the
amount of tax payable. Depreciation is one of the ways in which one can use to avoid taxes since
its calculation depends on estimates based on the valuation of the property, use of depreciation
expenses and other assumptions (McGuire, 2012).
A constructed building starts to experience a reduction in its early years. Higher provisions for
depreciation such as the Sum of Years Digits, assumes that a building is more famous during its
previous years than consecutive years. It provides a system whereby the percentage of the tax
deduction decreases with increase in years because it's assumed that the asset will lose most of
its value as it approaches the beginning of its useful life. When a company that owns a building
decides to transfer ownership to a third party, the new owner starts to depreciate an already
depreciated building. The method of tax calculation is also changed, and in this case, the
depreciation can be over-provided. The tax liability on the new owner is also reduced, leading to
tax avoidance (Desai, 2009).
Owners who borrow to buy a property from a company, can also use accelerated depreciation on
the property to avoid tax. They use the argument that there is little or no profit generated from
the property since depreciation expense and interest expense are tax deductible (Kim, 2011).
Desai, M. A. (2009). Corporate tax avoidance and firm value. The review of Economics and
Statistics, 91(3), 537-546.
Kim, J. B. (2011). Corporate tax avoidance and stock price crash risk: Firm-level analysis.
Journal of Financial Economics, 100(3), 639-662.
