Certified Aviation Manager (CAM) Practice Test

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

1. They are usually equal

2. Book depreciation is greater than tax depreciation

3. Book depreciation is less than tax depreciation

4. Book depreciation is unrelated to tax depreciation

The correct answer is: Book depreciation is less than tax depreciation

In many cases, book depreciation is less than tax depreciation over equal time horizons due to the different methods utilized for financial reporting versus tax reporting. Book depreciation is often calculated using methods such as straight-line depreciation, which allocates the cost of an asset evenly over its useful life. This approach is designed for consistency and accuracy in financial reporting, reflecting the wear and tear or usage of the asset over time. Conversely, tax depreciation may employ accelerated methods, such as double declining balance or section 179 expensing, which allow for larger deductions in the earlier years of an asset's life. This results in higher depreciation expenses on the tax return during the initial years, ultimately reducing taxable income more significantly and providing tax benefits sooner. As a result, over the same time horizon, the cumulative effect of these depreciation methods often leads to book depreciation being lower than tax depreciation, particularly in the earlier years of an asset’s life. This phenomenon is important for businesses to understand as they manage their finances and tax strategies.