Suppose firms A and B have identical revenues and operating expenses, so that each has earnings before amortization and taxes of $10 million. Both firms will report amortization of $1 million on their public financial statements. On its tax return, firm A claims $1 million for CCA, whereas firm B claims $2 million. The tax rate is 30 percent of taxable income.
a. Is it legal to report different amortization for financial statement and for tax purposes?
b. Which firm pays higher taxes?
c. How much tax will each firm pay?
d. What is the net income for each firm?