How do book depreciation and tax depreciation differ?

• A. Book depreciation is recorded on financial statements; tax depreciation is recorded on tax returns and follows IRS rules.
• B. Book depreciation is determined by tax authorities; tax depreciation is determined by company books.
• C. Book depreciation is recorded on tax returns; tax depreciation is recorded on financial statements.
• D. There is no difference between book and tax depreciation.

Answer: (A)

Depreciation serves two purposes: showing how an asset’s value is used up for financial reporting and reducing taxable income for tax purposes. Book depreciation is the accounting expense recorded on financial statements under GAAP/IFRS to reflect wear and use over the asset’s life. Tax depreciation, on the other hand, is the deduction allowed on the tax return, governed by the tax code and specific rules (such as IRS schedules), which often differ from accounting methods. Because these rules don’t have to align, the depreciation expense shown to investors can diverge from the tax deduction, creating timing differences and potential deferred taxes. So the correct understanding is that book depreciation appears on financial statements, while tax depreciation appears on tax returns and follows IRS rules.