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What is the difference between Accounting Depreciation & Tax Depreciation?


What is the difference between Accounting Depreciation & Tax Depreciation?

Accounting depreciation is the method used by a company in preparing its financial statements. Tax depreciation is the method used in preparing the company's tax returns (both Federal and state).

The theoretical purpose of accounting depreciation is to spread the cost of a fixed asset over its useful life. Depreciation methods include straight-line and accelerated.

For tax purposes, an acquired fixed asset having a life greater than one year is allowed to be deducted over a time period approved by the government. This time frame may not bear any resemblance to the actual life of the asset acquired. Tax policy is modified from time-to-time to achieve certain ends, (such as to promote investment in fixed assets) and things such as bonus depreciation are allowed as tax incentives.

In many cases, a company will choose to use one of the government approved depreciation methods for their accounting, in order to simplify the work. If a company chooses a Federal accelerated depreciation method for their books, they may still need to recalculate depreciation for state tax returns because many states do not accept accelerated depreciation. Source(s): Company Controller & CPA
Accounting depreciation is left up to the company there are permitted to use straight line, MACRS, or DDB. But for tax purposes every company in the USA must use MACRS which is an accelerated depreciation that lets the company recovery more of the depreciation in the beginning of the life of the asset when the asset has the most use. Many companies now are changing to use the MACRS system for both accounting and tax depreciation. Hopefully i answered your question the way you needed
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