If a company depreciates an asset at a faster rate for tax purposes than for financial reporting purposes this will give rise to a deferred tax liability.

Question

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When an asset is depreciated at a faster rate for tax purposes than for financial reporting purposes, the taxable income will be lower than the pretax financial income, leading to tax savings in the short term. However, this will also result in a deferred tax liability because the taxable income will be higher in the future when the reporting depreciation catches up to the tax depreciation.

If a Company Depreciates an Asset at a Faster Rate