The Need For Book / Tax Reconciliation

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Table of Contents Introduction 2 The Need for Book/Tax Reconciliation 3 Facts Used in Illustration …………………………………………………………………………………………………………………….4 Analysis of Book/Tax Differences used in Illustration ………………………………………………………………..……….5 Illustration of Book/Tax Reconciliation ………………………………………………………………………………………………8 Conclusion …………………………………………………………………………………………………………………………………………8 Works Cited Page ……………………………………………………………………………………………………………………………10 Introduction: Accounting has two major systems in place to present information in the United States of America. The systems are GAAP; Generally Accepted Accounting Principles; and Income Tax Basis. The systems share a common goal; to make information easy to read and understand across the business…show more content…
The methods described in the code section are, (1) The cash receipts and disbursements method (cash method for short) (2) An accrual method (3) Or a hybrid method Accrual method for income is not the same as accrual or GAAP. The differences between the three methods and what is known as GAAP accrual is where the Book (GAAP) to Tax differences arise. The Need for the Book to Tax Reconciliation The Book to Tax reconciliation is used to get from book income, usually following GAAP accrual, to taxable income. For small companies, Schedule M-1 is used. For larger companies, Schedule M-3 is used. Companies following GAAP want their income to be as high as possible to attract investors; however on their tax return they would like income to be as small as possible creating a smaller tax liability. Following the logic, book to tax is needed to make both the investors happy and the company paying the tax happy. FASB has created a way to deal with the problem, ASC 740: Accounting for Income Taxes. Before ASC 740 was FASB No. 109, a similar version of accounting for income taxes without uncertain tax positions addressed. Uncertain tax positions were addressed in a code 48. ASC 740 brings both codes together. ASC 740 states, There are two primary objectives related to accounting for income taxes: a. To recognize the amount of taxes payable or refundable for the current year b. To recognize
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