What is the difference between accounting and income tax treatment?

Question

Can anyone tell me what is an accounting treatment and what is an income tax treatment? I am having trouble with identifying them. Some examples too would be great. Thanks

Answer 1

So it may be weird to understand but companies generally use 2 different depreciation treatments for their tax returns and their financial reports. The difference in the timing of this recognition will lead to a deferred tax liability or a deferred tax asset.

Now think about taxes for a second and realize that if you are a company or an individual, you want to pay as little as you can in taxes. So what we can do is use an accelerated method MACRS, double declining,etc. to reduce net income in the early years of use of the asset. This increased depreciation "charge" will increase expenses and thus reduce our EBT and reduce our tax bill.

For the financial statements we use a book depreciation to match the life of the asset on our balance sheet. So we typically see companies use a simpler depreciation schedule like straight line to do so.