Unique features of depreciation under tax codes

It is important to note that tax methods and financial accounting methods are not always the same. This is certainly true when it comes to the subject of depreciation. For example, when the economy “slows down” governments will often try to stimulate economic investment activity by providing special incentives that are realized through rapid depreciation for tax purposes (even immediate write-off in some cases). The depreciation causes a decrease in taxable income and a company’s tax obligation. This feature can provide significant incentives for capital investment. The history of tax laws is marked by many changes to the depreciation rates and methods. As a result, it is difficult to generalize. But, one depreciation technique is known as the Modified Accelerated Cost Recovery System (MACRS, pronounced “makers”). MACRS provides for a general depreciation system and an alternative system. Within those systems are generally provisions relating to the 200% declining balance, 150% declining balance, and straight-line techniques. Further, tax systems will generally stipulate the useful life of an asset rather than leaving it to the imagination of the taxpayer. Tax codes tend to be very complete in identifying assets and their lives. Tax codes tend to be “favorable” to taxpayers, and generally result in depreciation occurring at a faster rate than under generally accepted accounting principles. Is it bothersome that a company would use one accounting method for financial reporting and another for tax? Consider that accounting rules are about measuring economic activity of a business and require a proper scheme for assigning revenues and costs to time periods. Meanwhile, tax codes must be followed and often change to meet the revenue or social objectives of the government. As a result, temporary (and sometimes not so temporary) differences will arise between accounting and tax measurements. Records of these differences must be maintained, making the accounting task all the more challenging for a complex business organization.