Which statement about GAAP depreciation is correct?

Which statement about GAAP depreciation is correct?

• A. Depreciation increases cash taxes.
• B. Depreciation is a cash expense.
• C. Depreciation has a cash tax effect.
• D. GAAP depreciation has no direct cash tax effect.

Answer: (D)

GAAP depreciation is a non-cash charge that reduces reported (pretax) income on the income statement without requiring any cash outlay in the period it’s recorded. The actual cash tax paid to the government depends on taxable income and the tax depreciation rules, which can differ from GAAP depreciation. The difference between the two methods creates timing differences that show up as deferred tax assets or liabilities, affecting cash taxes only when those differences unwind, not directly in the period of depreciation. So GAAP depreciation has no direct cash tax effect in the period it’s recorded.

GAAP depreciation is a non-cash charge that reduces reported (pretax) income on the income statement without requiring any cash outlay in the period it’s recorded. The actual cash tax paid to the government depends on taxable income and the tax depreciation rules, which can differ from GAAP depreciation. The difference between the two methods creates timing differences that show up as deferred tax assets or liabilities, affecting cash taxes only when those differences unwind, not directly in the period of depreciation. So GAAP depreciation has no direct cash tax effect in the period it’s recorded.