Question

The depreciation tax shield is best defined as the: Select one: amount by which the aftertax depreciation expense lowers net income. tax that is avoided when an asset is sold as salvage. amount of tax that is saved when an asset is purchased. amount of tax that is saved because of the depreciation expense. amount of tax that is due when an asset is sold.

Answer 1

Answer:

amount of tax that is saved when an asset is purchased.

Explanation:

Depreciation can be defined as a process in which the monetary or financial value with respect to an asset decrease or falls over time as a result of wear and tear.

This ultimately implies that, depreciation is a process which typically involves the general fall in the value of an asset such as currency, plant equipment or machinery etc over a specific period of time.

Taxation can be defined as the involuntary or compulsory fees levied on individuals or business entities by the government to generate revenues used for funding public institutions and activities.

A tax shield can be defined as the deliberate reduction in income taxes by allowing deduction in taxable income. Thus, it involves availing taxable expenses or deductions to offset taxable income.

Hence, a depreciation tax shield refers to the amount of tax that is saved when an asset is purchased. It is a technique used for reducing tax by subtracting depreciation expense from taxable income.