Final answer:
It is legal for a company to use different depreciation methods for tax and financial reporting purposes. The Modified Accelerated Cost Recovery System (MACRS) is commonly used for tax purposes, while the straight-line method is used for financial reporting. This practice is allowed under GAAP and tax law and is done to meet the different objectives of taxation and financial reporting.
Step-by-step explanation:
True. It is indeed legal for a company to use one method of depreciation for tax reporting purposes and a different method for financial reporting purposes. For tax purposes, companies typically use the Modified Accelerated Cost Recovery System (MACRS), which is a type of accelerated depreciation providing higher expenses in the initial years of an asset's life. This method is sanctioned by the Internal Revenue Service (IRS) for the calculation of tax liabilities.
For financial reporting purposes, however, companies often use the straight-line method of depreciation, which spreads the cost of an asset evenly over its useful life. This method is preferable for financial reporting because it creates a smoother pattern of expense over time, leading to more predictability in financial statements used by investors, creditors, and other stakeholders.
Different methods are used because taxation and financial reporting have separate goals. Taxation aims at compliance with tax laws, which may incentivize certain behaviors, such as investments in capital assets. Financial reporting, on the other hand, aims at providing a fair and consistent representation of a company's financial health. Both practices are regulated and permissible under Generally Accepted Accounting Principles (GAAP) and tax legislation respectively.