Assets Tax Deductible only, understand, difference, government, carrying

kim226

A very basic question: Why are assets tax deductible? In determining the tax base of an asset, I am to figure out the difference between the carrying amount and the taxable amount of the asset.

But I don't understand why the government would want to tax assets. I thought they only taxed incomes that flowed through the income statement because that is what the company earned.

PLEASE HELP

ogoluwa

You need accounting 101, but here's a basic answer.

You pay taxes on money you take in, and get to deduct money you spend. If the money you spend benefits aspecific period that is =< than 1 year (such as a paycheck for a given week) you deduct that full expense in the year it was paid.

If what you spend the money on somethign that will last for several years (ie a machine that will last 5 years) you record that initisl outlay as an asset and use it up (depreciate it) over the 5 years in which it will provide service. This depreciation is recorded as a deduction in the income statement.

Hope this helps a bit, but you really need to crack an intro accounting text.

Daniel1985

Thank you. I understand the majority of that.

If I may throw out my view of it to make sure it is correct: Therefore it is the depreciation that is deducted on the income statement over time that is tax deductible, not the equipment on the balance sheet. That is what threw me off: the asset is tax deductible. But it isn't, it's the benefits realized from the assets. Yes?

Bare with me.

eagles_dare13

It's all based on the fundamental accounting principal of matching revenues and expenses, ie matching revenues that are earned with the expenses incurred to produce those revenues. Purchasing an asset is a cash outlay, but becuase it will help earn revenues during multiple periods you have to match that by breaking up that asset cost into annual depreciation charges.

So yes, it is the depreciation of that asset that shows up as a deduction on the income statement , with the tax depreciation (depreciation calculated as per tax law which allows you to take more of it in early years than book depreciation) which will show up on the company's tax return.

The concept of book vs tax depreciation and its consequences is a bit more of an advanced topic.