Book depreciation matches cost to the years an asset earns revenue; tax depreciation under MACRS with bonus and section 179 comes sooner. ASC 740 records the difference as a deferred tax liability: the excess of the book carrying amount over the tax basis, times the enacted rate. It grows when tax runs ahead and unwinds as book catches up.
Book and tax depreciate the same asset on different clocks.
The financial statements depreciate an asset over its useful life, straight line more often than not, to match its cost against the revenue it earns. The tax return depreciates it under MACRS, with bonus depreciation and section 179 pulling the deduction forward. The asset's cost is recovered in full in both places; the difference is timing, and ASC 740 requires the timing difference to appear on the balance sheet as a deferred tax liability (or asset) so that the tax expense in the income statement matches the book income, not the return.
The liability is the basis difference times the rate.
At each balance sheet date, the deferred tax liability on fixed assets equals the excess of the book carrying amount over the tax basis, multiplied by the enacted rate expected to apply when the difference reverses (ASC 740-10-25 and 30). The movement in the liability from one year-end to the next is the deferred tax expense or benefit for the year. When tax depreciation runs ahead of book, the liability grows; when book catches up, it shrinks; when the asset is sold, the remaining difference reverses through the gain.
| Year | Book depreciation | Tax depreciation | Book basis, year-end | Tax basis, year-end | Temporary difference | Deferred tax liability at 21% | Deferred tax expense (benefit) |
|---|---|---|---|---|---|---|---|
| 2026 | 20,000.00 | 100,000.00 | 80,000.00 | 0.00 | 80,000.00 | 16,800.00 | 16,800.00 |
| 2027 | 20,000.00 | 0.00 | 60,000.00 | 0.00 | 60,000.00 | 12,600.00 | (4,200.00) |
| 2028 | 20,000.00 | 0.00 | 40,000.00 | 0.00 | 40,000.00 | 8,400.00 | (4,200.00) |
| 2029 | 20,000.00 | 0.00 | 20,000.00 | 0.00 | 20,000.00 | 4,200.00 | (4,200.00) |
| 2030 | 20,000.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | (4,200.00) |
| Total | 100,000.00 | 100,000.00 | 0.00 |
State books add a second difference.
Where a state adds bonus depreciation back, the state tax basis is higher than the federal tax basis, and the state deferred tax is computed on the difference between the book carrying amount and the state basis at the state rate. A register that carries the four books on each asset produces the basis in each at any date; the tax versus book reconciliation report lists the differences by asset and in total, which is the schedule the deferred tax computation starts from and the auditor tests. Without a state book, the state difference is a memorandum that has to be rebuilt each year.
What the register produces.
Cost, accumulated depreciation and net book value in each book at the balance sheet date; the year's depreciation in each book; the difference by asset, by class and in total; and, on disposal, the gain in each book. The reports page lists the tax versus book reconciliation among the standard reports, and the state conformity article covers where the state basis comes from.
Depreciation detail with remaining lifeSchedule: Book · As of 30 Sep 2026 · Grouped by class
| Asset | Description | In service | Method | Life | Cost | Prior | 2026 YTD | Accumulated | Net book |
|---|---|---|---|---|---|---|---|---|---|
| 10120 | Nonresid. improvement, Bldg 2 | 06/2019 | SL | 39 | 312,000.00 | 52,666.67 | 6,000.00 | 58,666.67 | 253,333.33 |
| 10412 | Vertical machining center | 05/2023 | SL | 10 | 148,500.00 | 39,600.00 | 11,137.50 | 50,737.50 | 97,762.50 |
| 10577 | Delivery van, unit 7 | 09/2024 | SL | 5 | 58,900.00 | 15,706.67 | 8,835.00 | 24,541.67 | 34,358.33 |
| 10603 | Warehouse racking, aisle 3 | 01/2025 | SL | 7 | 24,300.00 | 3,471.43 | 2,603.57 | 6,075.00 | 18,225.00 |
| 10688 | Server cluster | 03/2026 | SL | 3 | 41,200.00 | 0.00 | 8,011.11 | 8,011.11 | 33,188.89 |
| 10240 | Office furniture, HQ 3rd floor | 06/2026 | SL | 7 | 9,600.00 | 0.00 | 457.14 | 457.14 | 9,142.86 |
| 09877 | Forklift, unit 3 | 04/2018 | SL | 7 | 31,750.00 | 31,750.00 | 0.00 | 31,750.00 | 0.00 |
| 10311 | Laptops (12), sales | 02/2024 | SL | 3 | 18,420.00 | 11,768.33 | 4,605.00 | 16,373.33 | 2,046.67 |
| Grand totals, 8 assets shown of 1,203 | 644,670.00 | 154,963.10 | 41,649.32 | 196,612.42 | 448,057.58 | ||||
What to record on the asset.
- The method, life and convention in each book, so the bases diverge by rule and not by adjustment.
- Prior depreciation in each book on conversion, as filed, because the opening difference is inherited.
- The rate applied to each book's difference, federal and state.
- Disposals with the gain by book, because the reversal on sale is where errors surface.
- Overrides to any book's figures, with the reason, because they change the difference.
In Fixed Asset Desk: the tax versus book reconciliation report shows the difference in expense and accumulated depreciation between any two books, by asset and in total.
Sources: FASB ASC 740-10 (income taxes), paragraphs 25-2 and 30-8; Internal Revenue Code sections 168 and 179. Checked 20 September 2026.