Question

In its basic form, we see that pretax financial income (GAAP income before taxes) is not the same as taxable income (under the IRC). There are many specific reasons for these differences, but basically GAAP and the IRC do not treat all revenues and expenses the same. Why is this the case?

Answer 1

The major difference as to why the incomes and expenses are different under IRC and GAAP is the recognition of income and expenses. Under GAAP the accounting is done on accrual basis whereas taxable income is majorly computed on a cash basis although it explicitly does not mention any such method. The primary reason being taxation authorities want taxes to be paid on all incomes earned irrespective of the accounting period and do appreciate any deferment of expenses or incomes. With taxes being the major source of revenue for the government and certainly the logic is that the government cannot wait for revenue based on future income or accrual accounting. They will want as may taxes to be paid in the present than in the future or will not want the tax payer to reduce any income which will reduce the tax paid.