Question

Tybee, Inc. placed a $15,000 machine in service. For tax purposes, the company used Section 179 to immediately deduct the cost. For book purposes, the company recorded a first-year straight-line depreciation expense. The depreciation expense is a _____ book-tax difference for Tybee.

a. positive.
b. negative.
c. zero.
d. deferred.

Answer 1

The first-year straight-line depreciation expense for book purposes, contrasted with the Section 179 immediate tax deduction, creates a temporary book-tax difference that will result in deferred taxes.

Step-by-step explanation:

The depreciation expense recorded for book purposes but not deducted for tax purposes due to the Section 179 immediate expense deduction would create a temporary book-tax difference for Tybee, Inc. Since the expense is recognized all at once for tax purposes but spread out over time for book purposes, this difference will reverse in future years as the book depreciation catches up with the immediate tax deduction taken in the first year.

Because the immediate expense reduces taxable income but not book income in the first year, this results in a temporary difference that will lead to deferred taxes.