What must a company do if GAAP depreciation is materially different from tax depreciation?

When a company's GAAP depreciation diverges materially from its tax depreciation, it is essential for the company to adhere to specific accounting and reporting standards. Using the GAAP amount for financial statements is necessary because GAAP, or Generally Accepted Accounting Principles, governs how businesses should recognize and report their financial data to ensure consistency and transparency. Financial statements prepared under GAAP provide a true and fair view of a company's financial health to investors, regulators, and other stakeholders.

For tax purposes, the company must report the tax depreciation amount on its tax return as dictated by tax laws, which may allow for different methods and rates compared to GAAP. This dual reporting is crucial because it satisfies both regulatory requirements while also recognizing the tax benefits of depreciation as permitted by tax law.

Companies typically maintain separate records for financial accounting and tax accounting, which allows them to comply with both GAAP for their financial statements and IRS requirements for tax returns while accurately reflecting their financial position and tax obligations. This approach helps in avoiding penalties or issues with regulatory bodies such as the IRS, while also providing essential financial information to stakeholders.