Tax
Savings
Tax saving is a concept
associated with the expenses. When there is an increase in the expense, it will
reduce the taxable profit and ultimately lower tax will be paid on profit. Therefore
expense results in tax saving. This concept widely used in investment appraisal
techniques.
Tax
Saving Example
ABC Company reported a
profit of $40,000 for the 2015. Tax rate is 40%. Auditor pointed out that management
forgot to account for the depreciation of $ 10,000. Calculate the profit and
tax before and after the depreciation adjustment.
Solution
|
|
2001
(without Depreciation)
|
2001-
(with
Depreciation)
|
|
Profit
|
$ 40,000
|
$
40,000
|
|
Depreciation
|
|
$
10,000
|
|
Profit
after Depreciation
|
$
40,000
|
$
30,000
|
|
Tax
|
$
16,000
|
$
12,000
|
Above example indicates
that depreciation (expense) has reduced the taxable profit and tax expense.
