Question

Marcellus Jackson, the CFO of Mac. Inc., notices that the tax liability reported on Mac's tax return is less than the tax expense reported on Mac's financial statements. Write a letter to Jackson outlining why these two tax expense numbers might differ. Mac's address is 482 Linden road, Paris, KY 40362

Answer 1

To

Marcellus Jackson,

CFO, Mac. Inc

482 Linden Road, Paris, KY 40362

Dear Sir,

There is a difference between the tax liability reported Mac's tax liability on the tax return and the tax expenses reported in the financial statements. The reasons for this difference could be:

> The timing of revenue and expense recognition in the financial statements and the tax returns differ. The tax cycle may be different from the financial year.

> Certain revenues and expenses are recognized in the financial statements but not on the tax return, since they are not deductible.

> Assets and Liabilities have different carrying amounts and tax bases. This could be because the tax laws restrict the amount of depreciation that may be charged on certain assets or write-offs of certain liabilities. Or the tax laws may restrict the recognition of certain gains and losses which are included in the financial statements.

> Tax losses from prior period offset current taxable income.