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1 David S. Logan, Three Differences between Tax and Book Accounting that Legislators Need to Know 1 (2011)

handle is hein.taxfoundation/ffchhxz0001 and id is 1 raw text is: M\1 .........1 °\\N I July 27, 2011 No. 277 Three Differences Between Tax and Book Accounting that Legislators Need to Know By David S. Logan Introduction There has been a flurry of sensational press accounts in recent months about the taxes paid by large corporations. These stories have reignited an ongoing debate over the different ways in which a company's profits and tax liability are presented to shareholders on financial statements and what is reported to the IRS on a company's tax return. While the differences between book and tax accounting are no doubt confusing to many, it is entirely reasonable that there be considerable differences between the two practices. After all, corporate accounting standards are typically set by the independent Financial Accounting Standards Board (FASB), while the Internal Revenue Code is a product of the political process between Congress and the While House. Tax rules are driven by broader public policy concerns rather than adherence to formal accounting practices. So while Generally Accepted Accounting Principles' (GAAP) are intended to ensure uniformity of companies' financial statements and accounting methods, similar activities may be treated very differently for tax purposes.2 Therefore, it is possible for the financial reports of a company to differ from the tax returns prepared for the IRS because of the different accounting methods. The following are just three of the most common textbook differences between book and tax accounting: 1) Cash-Based vs. Accrual-Based Accounting While certain activities of a corporation may be recorded on a cash basis for tax accounting, most activities accounted for in its financial statements are done so using what is known as the accrual method. For example, when a company receives payment for a service or product, it is immediately taxable income in the view of the IRS (unless it is deferred David Logan is an economist at the Tax Foundation. 1 State of Washington Office of Financial Management, Generally AcceptedAccounting Principles, State Administrative & Accounting Manual, 80.20, pp. 7-17, http://www.ofm.wa.gov/policy/80.20.htm, 2009. 2 It is also important to note that corporate financial statements are publicly available while IRS tax returns are confidential and not available for public review.

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