Question

The Tax Cuts and Jobs Act allows firms to immediately deduct the full cost of many assets rather than depreciating that cost over several years using the MACRS rules. Suppose a firm buys a new assets and immediately deducts its full cost. The firm will have​ ________.
A. higher profits and higher cash flows than it would have had under the MACRS system
B. higher profits and lower cash flows than it would have had under the MACRS system
C. lower profits and lower cash flows than it would have had under the MACRS system
D. lower profits and higher cash flows than it would have had under the MACRS system

Answer 1

Answer:

The answer is: D) lower profits and higher cash flows than it would have had under the MACRS system.

Explanation:

When a company uses Bonus Depreciation (raised to 100% by Tax Cuts and Jobs Act of 2017) it can deduct the full cost of buying the asset for tax accounting.

That means that the company will have a lower profit for that year (higher depreciation = higher costs), but at the same time its cash flow isn´t reduced by depreciation. Depreciation only reduces cash flows for tax purposes, since depreciation is a non-cash expense.