Under GAAP vs tax depreciation, which statement is true?

• A. GAAP uses straight-line depreciation, but tax uses accelerated depreciation
• B. GAAP uses accelerated depreciation, but tax uses straight-line
• C. GAAP and tax always use the same depreciation method
• D. GAAP uses unit-of-production depreciation while tax uses straight-line

Answer: (A)

At financial reporting, depreciation is used to allocate an asset’s cost over the periods that benefit from it, and straight-line depreciation is a common choice because it spreads the expense evenly, making earnings easier to compare across periods and companies. For tax purposes, the tax code encourages quicker recovery of asset costs, so accelerated depreciation schedules (such as MACRS) are used to provide larger deductions in the early years. This creates a timing difference between GAAP earnings and taxable income, which is why the statement that GAAP uses straight-line while tax uses accelerated depreciation reflects the typical separation between financial reporting and tax treatment.

In practice, GAAP can permit other depreciation methods for certain assets, and tax rules have nuances and exceptions, but the key idea is the everyday distinction: straight-line is the common GAAP approach for consistent expense recognition, and accelerated depreciation is the common tax approach to incentivize investment and defer taxes.