After a corporate acquisition, a tax advantage can occur because the amount of allowable depreciation increases reducing the income that the combined company must pay taxes on. For an acquisition with no net operating loss carryover, which one of the following best explains why there is an increase in the depreciation amount?

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When a company is acquired in a way that allows a purchase price allocation, the assets can be stepped up to their current fair market values. This increases the tax basis of the assets, so the depreciation deduction in future years becomes larger.

Depreciation is calculated from the asset’s basis, so a higher basis means a higher annual depreciation expense. That larger depreciation lowers the combined company’s taxable income, creating a tax shield. Since there’s no net operating loss carryover to absorb profits, the benefit comes from this larger depreciation deduction itself, not from offsetting past losses.

Other ideas—like tax rate changes, higher operating costs, or salvage value changes—don’t inherently increase the depreciation amount. They affect taxes or costs in different ways but don’t raise the depreciable basis.