Effects of tax planning with depreciation. This is completely hypothetical. Supp

Question

Effects of tax planning with depreciation. This is completely hypothetical. Suppose that Initech was able to accelerate its depreciation expense for tax purposes such that it was able to deduct an additional $100 million for tax purposes in 2011. Assume the only effect would be to U.S. federal taxes and that its marginal tax rate is 35%. That is, assume no interaction with state and foreign taxes in your answer. Assume it is certain that the IRS would agree with validity of the accelerated deductions.

a. By how much would Initech’s cash taxes paid change in 2011?

b. By how much would Initech’s cash flow from operations change in 2011?

c. By how much would Initech’s current tax expense change in 2011?

d. By how much would Initech’s deferred tax expense change in 2011?

e. By how much would Initech’s total tax expense change in 2011?

f. By how much would Initech’s net income change in 2011?

Explanation / Answer

As per rules I will answer the first 4 sub parts of the question

1:Cash taxes paid amount will decrease by $100m*35% = $35m

2: Cash flow from operations will increase by $100m*35% = $35m since there is tax saving.

3: Current tax expense amount will decrease by $100m*35% = $35m

4: Deferred taxes will not change.This is because deferred tax refers to tax impact of transactions that will result in future decreases in taxable income.

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