 Hello and welcome to the session in which we would look at the difference and depreciation method between the IRS, the government and FASB, which is tax versus accounting. In taxes, we use a system, which is the IRS system called the modified accelerated cost recovery system or for short makers. Now, if your intent is to learn about makers by all means go to my income tax course where I have the cost recovery system for all of makers. This illustration is to draw the difference between makers and FASB and gap depreciation. So let's look at the three major component that differentiate makers from gap. The first one is mandated tax life under the tax system. You don't choose the life of the asset. The IRS will give you the life of the asset and we're going to see how on the next slide under generally accepted accounting principle gap company or management choose the life of the asset. We can choose the life of the asset to be three, five, seven and we can change that as we saw in prior session. That's the first difference to under the makers. We use the cost recovery on an accelerated basis. Also, it's going to be provided to us. We don't choose it. It's going to be provided to us, but usually that method is accelerated basis and what's accelerated accelerated means fast. Now, the reason for the IRS is to recover your cost. They want you to deduct your cost for tax purposes. So you can get a tax deduction, buy more stuff and keep the economy going. And there's no salvage value under the tax. You don't assign a salvage value. The salvage value is always zero. So you have no choice. Again, the reason is part two and three are interconnected. They want you to depreciate to deduct everything so you can get a tax deduction under gap. Well, you can use the straight line, the double declining rate or any other method as long as it's reasonably possible. So gap don't care what you use. Also, you can estimate a salvage life under IRS. There's no salvage life. The salvage life is zero. The best way to show you this is to show you some examples from the IRS. Some of their choosing tax life. For example, they have what's called a three year property, five year property, seven year property. Under each property, they have different assets. So if you're not sure, for example, trucks are a five year property. Office furniture are seven year property. And this is just a small sample of the IRS list. It's a booklet. If you can think of anything of a calculator, they will tell you how many years you will depreciate the calculator. First, they tell you what's the class life. For example, you know, horses, they have a three year property. They fall in that class property, 10 year property. We have 15 year property. We have 20 year property. 20, 27.5, which is a residential real estate and 39 year property. So this, this, this record is provided from the IRS. So it's not like you can choose. So they will tell you, and this is just a sample of some assets. They have any possible asset. If they don't have it, you can call them and they will tell you it should fit under the 15 year, the 10 year, the seven year or whatever. Now here's how the depreciation happened for three, five, seven and 10 year assets. For those first four, we're going to be using the double declining balance. Simply put the straight line times two. This is the double declining balance or the 200% for 15 and 20 year property for those two property for 15 and 20 year property. We're going to be using the 150 declining balance. So they use a different rate for this to two here for the 27.5 and the 39 for those two classes of property. You will depreciate them using the straight line. Again, who tells you this? The IRS. So you have no choice. Once they will tell you your assets fits in this seven year property. Therefore, it's a double declining balance or your balance fits into the 20 year property. It's a 150 declining balance. So you have no choice over those options. Now the best way to illustrate this concept between IRS and GAAP is to actually look at an example and show you the difference from year to year. Because this topic is very important in accounting, especially in intermediate accounting, especially when you are dealing with the third tax. So this is basically a small introduction that you're going to see later when there is a difference between the book value of an asset for tax purposes and the book value of an asset for IRS purposes. Whether you are an accounting student or a CPA candidate, you want to be very familiar with this topic. And also I have the third taxes covered in my intermediate accounting in depth. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course. I'm a useful addition to your CPA review course, a useful supplement. I can help you understand the material differently. I can provide you alternative resources, lectures, multiple choice to help you understand the material, which in turn will help you for your exam. Your risk is one month of subscription. Your potential gain is improving your performance and passing the exam. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. This is a list of all my accounting courses, advanced accounting, cost accounting, governmental accounting. That's going to help you in your college career. Also my CPA supplemental resources are aligned with your Becker, Roger, Wiley and Gleam. So it's very easy to go back and forth between my courses and your CPA review course. I do provide you access to all the previously AI CPA released questions with detailed solution, almost 1500 questions in addition to thousands of CPA questions. If you haven't connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, share it with other connect with me on Instagram, Facebook, Twitter and Reddit. So let's take a look at this example to illustrate the concept between tax depreciation and gap depreciation. So we have this asset with the cost of every million estimated useful life is five years estimate, estimated salvage life is 100,000. According to makers, this asset has a class year life of five years, which is the same as gap happens to be the same. The makers method we're going to be using the 200 declining balance. The gap method we're going to be using the straight line the one that we choose. And after the asset is fully depreciated, we sold it for 90,000. Let's see what happened under the IRS. We have to go to the IRS tables. And this is a five year assets. We're going to go to the five year table, five year, 200 double declining. And we're going to be using those rate to depreciate the asset. Now, once again, this is not a tax course. If you want to go and learn about depreciation, please go to my tax course for hot lectures.com. I have one like I have eight lectures about depreciation for tax purposes. So let's go ahead and depreciate this asset for year one. For year one, we'll take the cost times point two, 200,000 year two. Again, the cost times point three, and those are coming from these tables. Year four, year four, year five, and year six, because the first year is partial depreciation. That's why we go into year six. And if we add all of these, notice we're going to have total depreciation of half a million. Simply put the book value of this asset equal to zero. By the time it's fully depreciated because we depreciate everything under makers under gap. We're going to take the cost minus the salvage value. Give us the depreciable base of 900,000. We're going to take the depreciable base divided by five. And every year we're going to depreciate the asset 180,000. So notice year one, the difference between 180 and 200 is 20,000. That's going to create a difference in book and tax record. But that's something you have to worry about later on. Then we're going to depreciate this asset for five years at a rate of $180,000 per year. So notice we're going to depreciate rather than a million. We're going to depreciate 900,000 and the book value is 100,000. So notice there's a difference between the book value. Now let's assume we sold this asset for 90,000. Well, if we sold it for 90,000 for tax purposes, we're going to have a gain of 90,000 because the basis is zero. For financial accounting for VASV purposes, if we sold this asset, we're going to have a loss of 10,000 because we did not recover the book value. We did not recover the book value. So that's the difference between VASV and IRS in a nutshell. Now again, this topic will be covered much, much, much more in details when we talk about deferred taxes, which I already have in my intermediate accounting and plus examples, plus illustration. But if you really want to learn this concept, go to farhatlectures.com, work multiple choice to get better at it. At the end of this recording, I'm going to remind you again, whether you are an accounting student or a CPA candidate, to take a look at my website, farhatlectures.com. I don't replace your CPA review course. I'm a useful addition. The risk is one month of subscription. Give it a try. You like it. You keep it. You don't. That's your maximum loss. I'm trying to help you put the exam behind you, the CPA exam behind you. Don't shortchange yourself as a lifetime investment. Good luck. Study hard and of course, stay safe.