How does book depreciation typically compare to tax depreciation over equal time horizons?

Book depreciation and tax depreciation often differ in methodology and objectives, leading to the scenario where book depreciation is typically less than tax depreciation over equal time horizons.

Book depreciation is calculated based on accounting principles and is aimed at accurately reflecting the company’s long-term asset values on financial statements. It usually follows a systematic approach like straight-line depreciation, which spreads the cost of the asset evenly over its useful life.

On the other hand, tax depreciation is guided by tax regulations that often allow for accelerated methods of depreciation. These methods, such as double declining balance or modified accelerated cost recovery system (MACRS), can lead to higher depreciation expenses in the earlier years of an asset's life. As a result, tax depreciation reduces taxable income more aggressively compared to book depreciation, allowing companies to defer taxes and improve cash flow in the short term.

This difference reflects the strategic financial management decisions companies make, where they prioritize tax advantages, thus resulting in tax depreciation being greater than book depreciation during the early years of asset use. Over time, the total depreciation for both methods will equal the asset's cost, but in the early periods, it's common for tax depreciation to lead, making the statement that book depreciation is less than tax depreciation correct.