Income Taxes

In filing income taxes with the United States government, a company must follow the regulations of the Internal

Revenue Code1. Those laws have several underlying objectives that influence their development.

First, they are designed to raise money for the operation of the federal government. Without adequate funding,

the government could not provide hospitals, build roads, maintain a military and the like.

Second, income tax laws enable the government to help regulate the health of the economy. Simply by raising or

lowering tax rates, the government can take money out of the economy (and slow public spending) or leave money

in the economy (and increase public spending). As an illustration, recently a significant tax break was passed by

Congress for first-time home buyers. This move was designed to stimulate the housing market by encouraging

additional individuals to consider making a purchase.

Third, income tax laws enable the government to assist certain members of society who are viewed as deserving

help. For example, taxpayers who encounter high medical costs or casualty losses are entitled to a tax break.

Donations conveyed to an approved charity can also reduce a taxpayer’s tax bill. The rules and regulations were

designed to provide assistance for specified needs.

In contrast, financial reporting for decision makers must abide by the guidance of U.S. GAAP, which seeks to

set rules for the fair presentation of accounting information. That is the reason U.S. GAAP exists. Because the

goals are entirely different, there is no particular reason for the resulting financial statements to correspond to the

tax figures submitted to the Internal Revenue Service (IRS). Not surprisingly, though, significant overlap is found

between tax laws and U.S. GAAP. For example, both normally recognize the cash sale of merchandise as revenue

at the time of sale. However, countless differences do exist between the two sets of rules. Depreciation, as just one

example, is computed in an entirely different manner for tax purposes than for financial reporting.