Have a Tax Question? Ask a Tax Expert
Generally, Sec. 446 requires taxable income to be computed under the same method of accounting as the taxpayer uses for its books. However there are differences in the accounting method used for GAAP versus tax....this could be cash method vs. accrual method, depreciation methods, expenses disallowed for tax but recorded in books and so on. Reconciliation of taxable income to book helps to quantify how much of the aggregate book-tax differences are due to differing rules for grouping entities for book and tax purposes. It helps to identify the effects of permanent and temporary accounting differences, because many tax shelters are designed to produce permanent differences.
It is important to understand how book income was determined before adjusting it to arrive at taxable income and also helps users of the financial statements and income tax returns to determine accuracy.