Differences Between Tax and Book Accounting in U.S.
Difference between net income per company’s financial statements and taxable income reported on the tax return exist because of the difference between Generally Accepted Accounting Principles (GAAP) and tax law.
Temporary differences are items of income or expense that are recognized in one period for book but in a different period for tax. These cause timing differences between the two incomes but, in the long run, there is no difference between book and tax.
For example, depreciation is typically calculated using a straight-line method for books but an accelerated method for tax. The difference between these two methods will create a difference in depreciation expense from year to year, but ultimately will result in the same total deduction for both and tax. This is a temporary difference.
Permanent differences are items of income or expense that are recognized for book but never recognized for tax, or vice versa. These cause permanent differences between book and taxable income.
Certain differences in book and tax income will never be reversed. Some common permanent differences include:
- Penalties and fines –These may be deducted from book income but are not deductible for tax purposes.
- Meals and entertainment – Costs for meals and entertainment can be completely expensed for book accounting. For tax purposes, a company can only deduct 50%of meals and 0% of entertainment expenses.
- Municipal bond interest – This is considered net income for book accounting, but it is not included in taxable income.
Unlike temporary differences, permanent differences only impact the specific period in which they occur, so they do not create deferred tax assets or liabilities.
The difference between Book Income/Loss and the Tax Income/Loss is reported on the tax return for larger entities that meet certain revenue and asset requirements. This reconciliation is contained on Schedule M-1 on 1065, 1120 and 1120S returns. If the total assets of the company are $10 million or greater, the company is required to reconcile book and taxable income/loss on Schedule M-3.
Reference：
https://www.taxslayerpro.com/blog/post/book-income-vs-tax-income
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