10RQ - Horngren'S Financial And Managerial Accounting

Question

What is the depreciation method that is used for tax accounting purposes? How is it different than the methods that are required by GAAP to be used for financial accounting purposes?

Step-by-Step Solution

Answer

The method used for tax accounting is the Modified Accelerated Cost recovery system, it is different from the depreciation methods of GAAP as in this method businesses cannot decide the useful life of assets

Method used in tax accounting

The method that is required by Internal Revenue Service (IRS) to be used for tax accounting is the Modified Accelerated Cost Recovery System (MACRS).

Difference between MACRS and other depreciation methods required GAAP

The major difference between MACRS and depreciation methods required by the GAAP is that in MACRS, the businesses do not get to choose the useful life of the asset, rather Internal revenue service specifies the useful life based on the specific classes.