What is the relationship between GAAP depreciation and MACRS for federal income tax?

The relationship between GAAP (Generally Accepted Accounting Principles) depreciation and MACRS (Modified Accelerated Cost Recovery System) lies in their distinct purposes and how each is applied in accounting and taxation.

GAAP provides a framework for preparing financial statements that reflect an accurate and consistent picture of an entity's financial position and performance. Under GAAP, businesses typically use straight-line or declining balance methods for depreciation, which aim to match expenses with revenue over the useful life of an asset.

On the other hand, MACRS is specifically designed for tax reporting. It allows businesses to recover the cost of certain assets more rapidly through accelerated depreciation methods, resulting in larger tax deductions in the earlier years of an asset's life. This is beneficial for managing cash flow, as it reduces tax liabilities sooner rather than later.

Understanding this distinction is crucial, as businesses must comply with GAAP for financial reporting but can elect to use MACRS for calculating taxable income. This results in different figures for depreciation when comparing financial statements and tax returns. Thus, the correct answer emphasizes that GAAP is used for financial reporting, while MACRS is utilized for tax purposes, highlighting the dual approach to depreciation in accounting practices.