Tax Allocation and Investment Decisions

by Alan Cerf



Basic difficulties exist in accounting for income taxes because the Revenue Code permits significant differences to arise between taxable income and business income. This article is a case study of the implications for an investor of these differences in one important area, namely, that of accelerated depreciation and tax allocation. Many variables affect the price and yield of a security, including the fact that different investors have different objectives in mind in choosing securities. Most evaluations, however, include an examination of the trend of profits. Operating results of companies in the same industry are compared and both the direction and the rate of change of profit are given attention. The importance of divergent accounting procedures to the investor depends on whether alternative procedures do in fact yield important differences in reported profits. A major objective of this article is to determine if the use of alternative accounting procedures is likely to cause significant conferences in reported profits and thereby hamper investment analysis.

California Management Review

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