ACCOUNTING FOR INCOME TAXES – US GAAP
Companies
have to file income tax returns following the guidelines developed by the
Internal Revenue Service (IRS). Because GAAP and tax regulations differ in a
number of ways, so the pretax financial income and taxable income will also
differ. Consequently, the amount that a company reports as tax expense will vary
from the amount of taxes payable to the IRS.
Pretax financial income is a financial reporting term. It also is often referred to as income before taxes, income for financial
reporting purposes, or income for book purposes. Companies determine pretax financial income
according to GAAP Rules. They measure it with the objective of providing useful
decision making information to investors and creditors.
Taxable income (income for tax purposes) is a tax accounting term. It indicates the amount used to compute
income taxes payable to the tax authorities. Companies determine taxable income
according to the Internal Revenue Code (the tax code).
To
understand how differences in GAAP and IRS rules may affect financial reporting
and taxable income, Let us consider the below example
