Discussion Question 17-17 (LO. 6) 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. Complete the letter below, outlining for Jackson why these two tax expense numbers differ. Maloney, Raabe, Young, Nellen, & Hoffman, CPAS 5191 Natorp Boulevard Mason, OH 45040 November 17, 2019 Marcellus Jackson Mac, Inc. 482 Linden Road Paris, KY 40362 Dear Mr. Jackson: A significant difference may exist between a corporation's U.S. Federal income tax liability as reported on its Form 1120 (tax) and the corporation's income tax expense as reported on its financial statements (book) prepared using generally accepted accounting principles (GAAP). This book-tax difference primarily is caused by the following: Differences in reporting entities included in calculation. Different definition of taxes included in the income tax expense amount. Different accounting methods. Different Reporting Entities. A corporate group required to consolidate all U.S. and foreign subsidiaries within a single financial statement for book purposes when the parent corporation controls more than % of the voting power of those subsidiaries. In cases where the parent corporation owns between 20-50% of another corporation, the parent uses the method to account for the earnings of the subsidiaries. Under this method, the parent currently records of the subsidiary's income or loss for the year. Corporations that own less than 20% of other corporations typically use the method to account for income from these investments and include income In contrast, for Federal tax purposes, a U.S. corporation may elect to any domestic subsidiaries that are 80% or more owned in its consolidated U.S. tax return. The income of foreign subsidiaries and less than 80% owned domestic subsidiaries is in the consolidated tax return. Different Taxes. The income tax expense reported on a corporation's financial statement is the combination of . Furthermore, this tax expense number includes . The income tax expense reported on the Form 1120 is Different Methods. Many differences exist between book and tax accounting methods. Some of these differences are simply differences with income and expenses appearing in both the financial statement and tax return, but in different periods. Other differences are differences, with items appearing in the financial statement or the tax return, but not both. I hope this answers your question regarding the difference in taxes shown on the financial statements and the income tax return for Mac, Inc. Please let me know if I can provide you with any additional information. My work is regulated under Circular 230. Very truly yours, Irene Collins Tax Consultant
