What are the differences between depreciation methods used for financial accounting and those used for tax...

What are the differences between depreciation methods used for financial accounting and those used for tax accounting purposes?

Expert Solution

The depreciation methods used for financial accounting or GAAP is different from those we use for the tax accounting purpose.

The depreciation method used for GAAP is straight line method inorder to value the asset based on its life and salvage value. The depreciation is calculated based on annual allowance of wear and tear of the assets which are depreciable.

Under tax accounting, IRS prefers MACRS (Modified Accelerated Cost Recevery System) method of depreciation. In this method, asset classes are presecribed some life time and depreciation is calculated based on some staggered formulae. A specific percentage of depreciation allowance is assigned each year and it brings the cost of the asset to zero without having any salvage value. With this method, the companies are able to depreciate more of their capital assets. The basic thing to remember is, this method is used in calculating the business income taxes and not to calculate the value of the company.

Hope this is helpful!!

ekkarill92 answered 1 year ago

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What are the differences between depreciation methods used for financial accounting and those used for tax...

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