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Three Differences Between Tax and Book Accounting that Legislators Need to Know

Summary:
Seems like many more than just Legislators could use some brushing up here (e.g. see post directly below this one...). While the differences between book and tax accounting are no doubt confusing to many, it is entirely reasonable that there be considerable differences between the two practices. After all, corporate accounting standards are typically set by the independent Financial Accounting Standards Board (FASB), while the Internal Revenue Code is a product of the political process between Congress and the While House.  Tax rules are driven by broader public policy concerns rather than adherence to formal accounting practices. T So while Generally Accepted Accounting Principles[1] (GAAP) are intended to insure uniformity of companies’ financial statements and accounting methods,

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Seems like many more than just Legislators could use some brushing up here (e.g. see post directly below this one...).

While the differences between book and tax accounting are no doubt confusing to many, it is entirely reasonable that there be considerable differences between the two practices. After all, corporate accounting standards are typically set by the independent Financial Accounting Standards Board (FASB), while the Internal Revenue Code is a product of the political process between Congress and the While House.  Tax rules are driven by broader public policy concerns rather than adherence to formal accounting practices. T
So while Generally Accepted Accounting Principles[1] (GAAP) are intended to insure uniformity of companies’ financial statements and accounting methods, similar activities may be treated very differently for tax purposes.[2] Therefore, it is possible for the financial reports of a company to differ from the tax returns prepared for the IRS because of the different accounting methods.

Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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