In: Accounting
A significant difference may exist between a corporation’s income statement and it’s Form 1120 prepared using generally accepted accounting principles (GAAP). These differences are discussed as follows:
-- Differences in reporting entities included in calculation:
A corporate group is required to consolidate all U.S. and foreign subsidiaries within a single financial statement for the purposes of book when the parent corporation holds controls which exceeds than 50% of the voting power of those subsidiaries. If the parent corporation holds between 20% and 50% of another corporation, the parent corporation have to apply ‘‘equity method’’ to account the subsidiaries earnings.
On contrary, for federal tax purposes, a U.S. corporation may choose to include any domestic subsidiaries where it owns 80% or more owned in its consolidated U.S. tax return. In the consolidated tax return income of foreign subsidiaries and less than 80% owned domestic subsidiaries are excluded.
-- Different Taxes:
On a corporation’s financial statement the income tax expense reported is the combination of federal, state, local, and foreign income taxes
Conversely, on the Form 1120 is the income tax expense reported is the current year Federal income tax expense only.
--Different methods:
The permanent difference arises due to the items that appear in financial statement or tax return, however not both. The temporary difference arises due to income and expenses appear in both the financial statement and tax return, however in different periods.