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Tax Depreciation - Noncurrent Assets in Financial Accounting
Tax law requires firms to use the Modified Accelerated Cost Recovery System (MACRS). This system specifies the useful lives to be assigned to different types of assets and also indicates the depreciation method to be used. For example, cars are assigned a five-year life and double-declining-balance depreciation is required. Therefore, cars are depreciated at a 40% declining-balance rate. As another example, land improvements, such as sidewalks and fences, are assigned a 15-year life and a 150% declining-balance rate is used. Sidewalks and fences would then be depreciated at a 10% rate (1/15 X 150% = 10%).
The details of tax depreciation and financial reporting depreciation differ because their objectives differ. Financial reporting is designed to provide useful information for financial statement readers. Therefore, utilizing reasonable estimates of useful lives, for example, is desirable. In contrast, one purpose of our tax laws is to spur economic growth. Using extremely short estimated lives and highly accelerated methods provides firms with tax benefits more quickly. As a consequence, firms are more inclined to acquire fixed assets, helping to fulfill the objective of economic growth.
Depreciation Methods and Topics
- Straight-Line Method (Depreciation Methods)
- Sum-of-the-Years’-Digits Method (Depreciation Methods)
- Declining-Balance (DB) Methods (Depreciation Methods)
- Tax Depreciation
- Selection of Depreciation Method
- Misconceptions About Depreciation
Property, Plant, and Equipment (PPE) Topics
- Property, Plant and Equipment (PPE)
- Initial Valuation of Property, plant, and equipment (PPE)
- Depreciation of Property, plant, and equipment (PPE)
- Expenditures After Acquisition - Property, plant, and equipment (PPE)
- Disposals of Property, plant, and equipment (PPE)
- Write-Downs - Property, plant, and equipment (PPE)
- Financial Statement Presentation of Property, plant, and equipment (PPE)
- Utilization of Property, plant, and equipment (PPE)
- Percentage of PPE Depreciated (Age)
- Evaluation of the Accounting for Property, Plant, and Equipment (PPE)
Related Noncurrent Assets Topics
