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Dynamic Tax Depreciation Strategies

Author

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  • De Waegenaere, A.M.B.

    (Tilburg University, Center For Economic Research)

  • Wielhouwer, J.L.

    (Tilburg University, Center For Economic Research)

Abstract

The tax depreciation decision potentially has significant impact on the profitability of firms and projects. Indeed, the depreciation method chosen for tax purposes affects the timing of tax payments, and, as a consequence, it also affects the after-tax net present value of investment projects. Previous research focusses on the optimal choice of depreciation method under the assumption that the depreciation method has to be set ex ante and cannot be changed during the useful life of the asset. However, several countries allow changes of depreciation method under certain circumstances. This paper develops a dynamic programming approach to determine the firm’s optimal choice with regard to the initial depreciation method, and whether changes of method are proposed in later periods.
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Suggested Citation

  • De Waegenaere, A.M.B. & Wielhouwer, J.L., 2008. "Dynamic Tax Depreciation Strategies," Discussion Paper 2008-87, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:53102e34-40e3-4c31-a426-955a852d40c4
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    References listed on IDEAS

    as
    1. Wielhouwer, Jacco L. & Waegenaere, Anja De & Kort, Peter M., 2002. "Optimal tax depreciation under a progressive tax system," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 243-269, December.
    2. J. L. Wielhouwer & A. De Waegenaere & P. M. Kort, 2000. "Optimal Dynamic Investment Policy for Different Tax Depreciation Rates and Economic Depreciation Rates," Journal of Optimization Theory and Applications, Springer, vol. 106(1), pages 23-48, July.
    3. De Waegenaere, A.M.B. & Wielhouwer, J.L., 2001. "Optimal Tax Depreciation Lives and Charges under Regulatory Constraints," Discussion Paper 2001-23, Tilburg University, Center for Economic Research.
    4. Sansing, R, 1998. "Valuing the deferred tax liability," Journal of Accounting Research, Wiley Blackwell, vol. 36(2), pages 357-363.
    5. Wakeman, Lee MacDonald, 1980. "Optimal tax depreciation," Journal of Accounting and Economics, Elsevier, vol. 2(3), pages 213-237, December.
    6. Berg, Menachem & Waegenaere, Anja De & Wielhouwer, Jacco L., 2001. "Optimal tax depreciation with uncertain future cash-flows," European Journal of Operational Research, Elsevier, vol. 132(1), pages 197-209, July.
    7. Vadim Arkin & Alexander Slastnikov, 2007. "The effect of depreciation allowances on the timing of investment and government tax revenue," Annals of Operations Research, Springer, vol. 151(1), pages 307-323, April.
    8. Sidney Davidson & David F. Drake, 1961. "Capital Budgeting and the "Best" Tax Depreciation Method," The Journal of Business, University of Chicago Press, vol. 34, pages 442-442.
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    Citations

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    Cited by:

    1. Gao, Yongling & Driouchi, Tarik & Bennett, David J., 2018. "Ambiguity aversion in buyer-seller relationships: A contingent-claims and social network explanation," International Journal of Production Economics, Elsevier, vol. 200(C), pages 50-67.
    2. Hagen Ackermann & Martin Fochmann & Nadja Wolf, 2016. "The Effect of Straight-Line and Accelerated Depreciation Rules on Risky Investment Decisions—An Experimental Study," IJFS, MDPI, vol. 4(4), pages 1-26, October.

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    More about this item

    Keywords

    Tax depreciation; Net Present Value; Dynamic Programming;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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