Optimal tax depreciation with loss carry-forward and backward options

摘要

The choice of depreciation method from among straight-line and accelerated methods can have a significant impact on the present value of expected tax payments. This is a problem that has been studied for decades, with most results indicating the optimality of accelerated methods. Recent research questions this claim by relaxing the assumption of positive taxable income. The situation where net-operating losses may be carried-forward and backward in time is the subject of this paper. We model this situation and establish conditions that allow straight-line depreciation to be preferred over accelerated methods. The results are focused around a threshold number of periods of consecutive losses, which are determined by the allowable periods to carry a loss forward. For consecutive losses beyond this threshold, straight-line will always be optimal. When the cumulative depreciation charges up to and including the window are guaranteed to be applied on or before the threshold period, then straight-line will never be optimal.