Final answer:
When a company reports more depreciation on its tax return than on its income statement, it indicates the use of different accounting methods.
This temporary difference is caused by variations in depreciation methods allowed by tax laws and GAAP. Over time, these differences usually balance out and result in deferred tax liabilities or assets.
Step-by-step explanation:
When a company reports more depreciation (and less income tax) on its tax return than it reports on its income statement prepared under GAAP, it means that the company is using different accounting methods for tax purposes and financial reporting purposes.
This is known as a temporary difference and is typically caused by differences in depreciation methods allowed by tax laws and generally accepted accounting principles (GAAP).
For example, let's say a company uses the straight-line method of depreciation for financial reporting purposes under GAAP, but it uses an accelerated depreciation method for tax purposes, which allows for larger depreciation deductions in the early years of an asset's useful life.
As a result, the company reports more depreciation (and less income tax) on its tax return compared to what it reports on its income statement.
Over time, these temporary differences generally reverse and result in the same amount of depreciation being reported for tax purposes and financial reporting purposes.
This is known as a deferred tax liability or asset, depending on whether the company has paid more or less income tax than it has reported for financial reporting purposes in previous years.