Every business should strive to file accurate income tax forms. And this usually means that what's reported for tax purposes matches what the company's (or owner's) accounting books also show. But are there times when your tax reporting may differ from your company's financial statements? And if so, how can you guarantee the correctness of both sets of statements? Here's what you need to know.
Can Tax Reporting Differ From Bookkeeping?
In short, yes, what you put on your state and federal income tax forms may differ from what's in your books. This is generally due to two factors. The first is that IRS or state agency tax rules don't necessarily align with GAAP (Generally Accepted Accounting Principles) in every way. The IRS may require, for instance, that income be reported for tax purposes at a different time than GAAP stipulates through the matching principles.
The second main reason for discrepancies is when the business may choose one of several methods for handling a transaction. Consider how depreciation works. Most businesses can choose different methods of depreciation, including writing off the same amount each year or accelerating that depreciation in the early years. Each method has its pros and cons, and the business may find that each offers different benefits in different parts of their financial reporting.
How Should You Approach These Different Methods?
Most small business owners shouldn't start adjusting their books or their tax reporting on their own. Discrepancies between these two sources of information can create confusion and make the books appear to be inaccurate or even unlawful. A proper paper trail must be created and discrepancies need to be reconciled at the end of the period. For example, different depreciation methods should all result in the same end figures when the asset is fully depreciated.
Therefore, if your business may need to — or want to — use different book and tax numbers, it should be done with the help of trained accounting professionals. They will work with you to determine where to deploy all options available to the business and how to document them.
Where Can You Learn More?
Before making any decisions about things like depreciation schedules, the timing of transactions, and different inventory reporting methods, start by consulting with an experienced accountant in your state. They will help your business ensure it minimizes its tax burden while maintaining the greatest accuracy and maximizing its profit margin. Contact an accounting firm today for all of your company's tax needs.