November 17, 2020

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 difference primarily is caused by the following:

• Different definition of taxes included in the income tax expense amount.
• Different accounting methods.

Different Taxes. The income tax expense reported on a corporation's financial statements is the combination of (#1)___________________________. Furthermore, this tax expense number includes (#2)__________________________. The income tax expense reported on the Form 1120 is (#3)_____________________________.

Different Methods. Due to the different purposes served by GAAP and taxable income, the period in which revenues and expenses (ARE/ARE NOT) recognized often differ across the two measures. As a result, many items of revenue and expense, though recognized for both book and taxable income, impact a companys taxable income in a different year than when it is reported in its book income. However, GAAP requires that all of the tax related to the (NET INCOME/NET LOSS) reported in the current-year financial statements be recognized in those financial statements. So the tax expense reported in the financial statements includes not only what is reflected on the current-year tax returns, but the tax consequences of those items that (ARE/ARE NOT) included in current-year book income (AND ALSO/BUT NOT) in current-year taxable income.

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.

Very truly yours,

Latoya Collins Tax Consultant

OPTIONS FOR #1

a) Federal and state income taxes

b) Federal, state, local, and foreign income taxes

or c) Federal, state, and local income taxes

OPTIONS FOR #2

a) both the current and deferred tax expense amounts

b) only the current tax expense amount

c) only the deferred tax amount

OPTIONS FOR #3

a) both the current and deferred federal tax expense amounts

b) only the current year federal tax expense amount

c) only the deferred federal tax amount