Question

Sherrod purchased an asset in 2020 at a cost of $80 million. Depreciation expense for financial and tax purposes is reported in the schedule below. Tax rates in 2020 are 20%. In 2021, the tax rate increased to 25%.

Please provide guidance or calculations for the depreciation expense, financial and tax purposes, and the associated tax implications for the years 2020, 2021, and 2022 based on the provided information. The answers are indicated in red.

Answer 1

The depreciation expense for financial and tax purposes is calculated differently. In 2020, the financial depreciation expense would be $8 million and the tax depreciation expense would be $16 million. In 2021, the tax depreciation expense would increase to $20 million.

Step-by-step explanation:

The depreciation expense for financial and tax purposes is calculated using different methods. In 2020, assuming a straight-line depreciation method, the annual depreciation expense would be $80 million divided by the useful life of the asset. Let's assume the useful life is 10 years, so the annual depreciation expense for financial purposes would be $8 million. For tax purposes, the depreciation expense is determined based on the tax rules and rates. In 2020, with a tax rate of 20%, the tax depreciation expense would be $80 million multiplied by 20%, which is $16 million.

In 2021, the tax rate increased to 25%. Therefore, the tax depreciation expense would be $80 million multiplied by 25%, which is $20 million. The financial depreciation expense would remain at $8 million.

In 2022 and subsequent years, the tax depreciation expense would continue to be $20 million, while the financial depreciation expense would remain at $8 million unless there are changes in the useful life or depreciation method.