Are income taxes affected by accelerated depreciation?
Using accelerated depreciation on the income tax return will mean greater depreciation expense and smaller taxable income in the earlier years of an asset's life. However, it will be followed by smaller depreciation expense and greater taxable income in the later years of the asset's life.
For a corporation with consistent taxable income, the use of accelerated depreciation on the income tax return instead of the straight-line method, will defer some income tax until the later years of an asset's life. Over the entire life of the asset, the total depreciation expense is the same. The methods merely affect the timing of the depreciation.
It is also important to note that a corporation may use the straight-line method on its financial statements and at the same time use accelerated depreciation on its income tax returns. The differences in income taxes resulting from using different methods are referred to as timing differences or temporary differences.
You can learn more about the reporting of income taxes caused by timing and temporary differences by reading the Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, available at www.FASB.org/st.