Depreciation and Income Taxes

The Internal Revenue Service (IRS) allows taxpayers to deduct depreciation expense when they compute taxable income. However, the IRS does not require taxpayers to use the same depreciation method on the tax return that is used in preparing fi nancial statements. Many corporations use straight-line in their fi nancial statements to maximize net income. At the same time, they use a special accelerated-depreciation method on their tax returns to minimize their income taxes. Taxpayers must use on their tax returns either the straight-line method or a special accelerateddepreciation method called the Modifi ed Accelerated Cost Recovery System (MACRS).

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