tax question?

Question

Why would a taxpayer choose one depreciation method for financial statement preparation and a different depreciation method for income tax purposes?

Answer 1

For financial statement purposes, to make the financial position look as strong as possible.

For tax purposes, to pay as little tax as possible.

Since different methods give different amounts, these two very rarely coincide.

Answer 2

financial statements are usually prepared using GAAP, and depreciation should represent the expensing of an asset over the asset's useful life. straight line depreciation, for example, can be used to expense the asset equally over a number of years.

for tax purposes, tax law allows us to use accelerated methods of depreciation and therefore depreciate more of the asset in the earlier years. it also allows us to expense an asset over a shorter life. if you get a larger depreciation deduction will give you a lower net income, and therefore lower tax liability. the IRS allows businesses to use sec. 179 and take an expense deduction for $108,000 of assets purchased. this is an incentive for people to start businesses and save tax money.

Answer 3

Companies may do this because you want to make your financial statements look as rosy as possible and therefore please the owners/shareholders. Therefore you use the method that makes your earnings look higher.

Come income tax purposes, you want to use the method that shows you have as little net income as possible so you pay less income tax.

Answer 4

Taking the answer above one more step; Time value of money.

Would you rather defer paying taxes until later or pay them now, up front. Most would rather defer by maximizing their deductions up front. Why pay taxes today if I can legally delay them until another year or years.