Tax Depreciation and Risk

Abstract

The theoretically ideal tax depreciation rule under an accretion tax is economic depreciation, a stream of deductions that replicates the decline in value of an asset over time. When the future value path of an asset is known in advance, the tax depreciation schedule should be based on the age-price profile for surviving assets. When the future value path of an asset is uncertain, this approach fails. A taxpayer can accelerate the statutory schedule by "strategic loss-taking." A series of special disposition rules (where each rule is combined with an adjustment in the ex ante depreciation schedule) address this problem, but each such rule has particular disadvantages. Finally, strategic loss-taking and rules designed to address it are particularly important in formulating a policy toward group accounting methods of depreciation.

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