Assuming a tax rate of 35%, depreciation expenses of $1,000,000 will
reduce income by 350,000
reduce taxes by 350,000
reduce taxes by 650,000
have no effect on income or taxes, since depreciation is not a cash expense
It will reduce taxes by $350,000, since it allows you to reduce taxable income by 1 million.
Depreciation expenses have an impact on both income and taxes. To understand how depreciation affects income and taxes, we need to consider how it is treated in accounting and taxation.
In accounting, depreciation is a non-cash expense that reflects the wear and tear or obsolescence of an asset over its useful life. The purpose of depreciation is to allocate the cost of an asset over its useful life, which matches the expense with the revenue it helps generate.
In taxation, the treatment of depreciation varies. In many tax jurisdictions, including the United States, there are specific rules for calculating depreciation deductions for tax purposes. The tax code allows businesses to deduct a portion of the cost of their assets as depreciation expense each year, which helps reduce their taxable income.
Now, let's address the specific scenario. Assuming a tax rate of 35% and depreciation expenses of $1,000,000, we can calculate the impact on income and taxes.
The depreciation expense of $1,000,000 will reduce the taxable income by that same amount. This means that the business will only be taxed on the remaining income after deducting depreciation.
Since the tax rate is 35%, the depreciation expense of $1,000,000 will reduce the taxes by 35% of $1,000,000, which is $350,000.
Therefore, the correct answer is: Depreciation expenses of $1,000,000 will reduce taxes by $350,000.