Tax Vs GAAP – What Small Business Owners Should Know

Written by Peter Tran

June 10, 2017

Small Business owner should understand the following before they decide to maintain their accounting records on the income tax basis or based on generally accepted accounting principles (“GAAP”). GAAP is proscribed by the financial Accounting Standards Board (“FASB”) and the Securities Exchange Commission (“SEC”) while the Internal Revenue Service is responsible for the establishment of […]

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Small owner should under the following before they decide to maintain their accounting records on the income tax basis or bas on generally accept accounting principles (“GAAP”).

  • GAAP is proscrib by the Financial Accounting ards Board (“FASB”) and the Securities Exchange Commission (“SEC”) while the Internal Revenue Service is responsible for the establishm of the income tax accounting framework. The primary purpose of the tax basis accounting is the determination of taxable income, whereas GAAP strives for comparability across ities. The income tax method of accounting may be pres on a cash or accrual basis.
  • The definition of revenue maybe significantly differ under the two accounting frameworks. GAAP recognizes revenue as earn; the IRS basis recognizes income when earn or upon the receipt of cash whichever is earlier. Under GAAP certain advance cash payms such as, r receiv in advance, subscription income, and income from sale of gift cards must be deferr until earn. In addition, the timing of ductions may be differ under both methods of accounting. For instance, GAAP may require companies to estimate and duct warranty s from gross revenue as revenue is recogniz. Under the income tax warranty s can be duct until a cash paym is actually made.
  • The handling of fix assets and depreciation repress aher area of major differences. Under the income tax , tenants who receive incives from landlords as a part of lease arrangems are requir to ruce the basis of the leasehold improvems made by the ext of the incives receiv. Under the GAAP framework the basis of leasehold improvems made is measur at the full cost associat with the improvems. Any lease incives receiv is record as an elem of deferr r; with the deferr r liability being reliev against r on the straight line basis over the lease. The issue of depreciation highlights numerous differences between the income tax and GAAP bases of accounting including the depreciation methods appli. The straight-line, declining balance, sum of digits and activity bas methods are among the most common methods us to estimate depreciation under GAAP. Tax accounting commonly uses the modifi accelerat cost recovery system (“MACRS”). In addition the IRS also allows section 179 and bonus depreciation. Both provisions allow taxpayers to certain fix assets up to a specific amount in the year of purchase.
  • Other common differences between the income tax and GAAP bases of accounting also include the treatm of goodwill, allowance for bad debt and invory. The income tax provides for the amortization of goodwill over a period of 15 years. Under the income tax rules a bad debt may only be recogniz at the time the debt is actually written off. On the other hand under the GAAP owners may record an for allowance for bad debt. GAAP does allow amortization of goodwill. Instead goodwill must be review regularly to determine whether the amount at which it is carri is recoverable, and any unrecoverable amounts written off as an impairm charge. Start-up and organization cost are currly expensable for GAAP purpose while they are capitaliz and amortiz over 15 years for tax basis accounting purposes. Accounting for invory is substantially the same under both bases of presation, however, if certain thresholds are met, certain indirect s must be capitaliz under section 63A of the income tax regulations.. Also, invory valuation allowance is currly expensable for GAAP purpose but can only be duct for tax purpose when the invory is actually written off.

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Small business owner should understand the following before they decide to maintain their accounting records on the income tax basis or based on generally accepted accounting principles (“GAAP”). GAAP is proscribed by the financial accounting Standards Board (“FASB”) and the Securities Exchange Commission (“SEC”) while the Internal Revenue Service is responsible for the establishment of […]

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How To Really REALIZE DREAMS COME TRUE?

Happiness is for those who plan well and pursue. A profound among us have been proven those who have true dream to live for likely REALIZED IT. It is just simply the person working toward the DREAM days and night until accomplishment. There is a phrase of efficiency a head of you. Steps and obstacles at first seem tremendous. However, just with some times those difficult steps and challenges are so easy performance for you. There are also plenty of tools including VISUALIZATIONS and helps are around you.

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COVID-19
HOW TO DEFEAT DEADLY CORONAVIRUS EVERY TIME?

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