Which statement best describes the tax impact of depreciation for small businesses?

Master Glencoe Entrepreneurship Finance Exam. Enhance your skills with detailed questions and comprehensive explanations. Prepare with confidence for success!

Multiple Choice

Which statement best describes the tax impact of depreciation for small businesses?

Depreciation is a non-cash deduction that spreads the cost of a capital asset over its useful life. By doing this, it reduces taxable income each year, which lowers the taxes the business owes. It doesn’t require cash in the year it’s recognized (the cash was spent when the asset was purchased), but it creates a tax shield that lowers cash taxes due. That’s why this statement—depreciation reduces taxable income by allocating asset cost over time—best describes its tax impact. The other ideas treat depreciation as a cash expense, or as something that increases taxes, or as having no tax effect, which isn’t accurate.

Depreciation is a non-cash deduction that spreads the cost of a capital asset over its useful life. By doing this, it reduces taxable income each year, which lowers the taxes the business owes. It doesn’t require cash in the year it’s recognized (the cash was spent when the asset was purchased), but it creates a tax shield that lowers cash taxes due. That’s why this statement—depreciation reduces taxable income by allocating asset cost over time—best describes its tax impact. The other ideas treat depreciation as a cash expense, or as something that increases taxes, or as having no tax effect, which isn’t accurate.

More practice questions