In: Accounting
Suppose you have a goods carrying agency, in which you have few lorries/trucks and you carry goods in them. So your vehicles have long distances to run. They depreciate much quicker than what a normally-run truck would depreciate. Let's say they will have to be salvaged in 3 years. So you depreciate them in such a way that the book value of the asset at the end of 3 years will equal salvage value. Let's take example numerically now.
Suppose the lorry costs $110,000, and at the end of 3 years it can be salvaged for $10,000. So you need to charge $100,000 as depreciation over the course of 3 years.
But say, IRS will only accept MACRS 5. So the depreciation as per MACRS for 3 years will be: $22,000; $35,200 and $21,120, which will total up to $78,320.
Now this is a difference between book and income tax, because
you would claim more depreciation per year, but IRS only considers
as per their system.
I used a very simple example, just so the concept will be
clear. Hope this helps.
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