Ajax Corp: Optimizing Tax Benefits with Depreciation Methods

How can Ajax Corp maximize its tax benefits through depreciation methods?

By using the 150% declining balance method of depreciation for tax purposes instead of the straight-line method, how much current tax benefit will Ajax Corp realize during the first year?

Maximizing Tax Benefits through Depreciation Methods

Ajax Corp can optimize its tax benefits by choosing the 150% declining balance method of depreciation over the straight-line method. By doing so, the company can potentially realize higher tax savings in the initial years of an asset's useful life.

Current Tax Benefit Calculation

Using the 150% declining balance method, the depreciation rate is 1.5 times the straight-line rate. For equipment with a useful life of 10 years and a cost of $100,000:

Straight-line method depreciation expense: $10,000 per year

Declining balance method depreciation expense: $15,000 for the first year

Current tax benefit = ($15,000 - $10,000) * 30% = $1,500

Maximizing Tax Benefits through Depreciation Methods

Depreciation is a key factor in determining taxable income and therefore, tax liabilities. By selecting a depreciation method that accelerates the recognition of expenses, such as the 150% declining balance method, companies like Ajax Corp can reduce their taxable income and maximize tax benefits.

Current Tax Benefit Calculation Explained

The current tax benefit is calculated by comparing the depreciation expenses under different methods and multiplying the difference by the effective tax rate. In this case, Ajax Corp's decision to use the declining balance method results in a higher depreciation expense for the first year, leading to a tax benefit of $1,500.

By effectively managing depreciation methods, Ajax Corp can strategically leverage tax provisions to optimize its financial performance and enhance shareholder value.