What is Book Depreciation?

Book depreciation is the amount of depreciation expense calculated for fixed assets that is recorded in an entity's financial statements. The amount of book depreciation recorded will depend on such factors as the presumed salvage value of assets, their useful life, and the depreciation method used.

The Difference Between Book Depreciation and Tax Depreciation

Book depreciation can vary from tax depreciation, which is the amount calculated for inclusion in an organization's tax return. These differences are as follows:

Different useful lives. The useful life for book depreciation is based on an asset's actual estimated useful life determined by the company or industry standards, while useful life for tax depreciation is based on the applicable tax regulations, which specify recovery periods for different types of assets.
Different salvage values. Salvage values may be incorporated into book depreciation calculations, while they are ignored for for the purposes of tax depreciation.
Impact on the financial statements. Book depreciation is an expense on the income statement and an asset reduction on the balance sheet, while tax depreciation reduces the taxable income on a reporting entity’s tax return.
Governing rules. Book depreciation is usually governed by Generally Accepted Accounting Principles or International Financial Reporting Standards, while depreciation is governed by the applicable tax jurisdiction.
Timing differences. Book depreciation is recognized logically over an asset’s useful life, while tax depreciation is usually front-loaded in order to reduce taxable income in the short term.

In summary, book depreciation focuses on accurate financial reporting, while tax depreciation aims to optimize tax benefits by adhering to tax law stipulations. These differences often create timing variances, but both serve important roles in their respective contexts.