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A new machniery is at a cost of $450,000 and have a useful life of 15 years and no salvage value at the end of the period. If the straight-line depreciation method is used for financial reporting and depreciation expense for tax perposes in year 1 is $ 45,000 and that the firm' tax rate is 30%, calculate:

The difference between texes actually paid in year 1 and tax expense reported in the financila statements in year 1?

 

[bklynboy]

For tax purposes the tax is $13,500 ($45K * 30%) where as book purposes the tax expense is $9,000 (450K/15 years * 30%). Difference is tax expense for books is lower by $4,500. I am assuming that the purchase happened 1/1 so 12 months of depreciation are taken in year 1.