Reconciling corporation book and tax net income, tax years 1996-1998 - Statistical Data Included

Statistics of Income Bulletin, Spring, 2002 by George A. Plesko

From 1997 to 1998, corporations with assets in excess of $250 million, and reporting positive pre-tax book income and zero or negative net income, reported twice the amount of book-tax income differences, from $41.3 billion to $98.8 billion. This increase in the book-tax difference for these corporations is also found in the bottom panel for corporations with assets of at least $250 million. For this subset of companies, the book-tax difference of returns showing positive pre-tax book income and zero income subject to tax more than doubled, from $50.4 billion for 1997 to $106.4 billion for 1998.

Book-Tax Differences by Industrial Division, 1996-1997

While aggregate differences are informative in helping to understand the importance of accounting differences in the measurement of income, they are not indicative of every industry. In this section, the extent of book-tax accounting differences are described by industrial division. Tables 1 through 6 present tabulations from Schedule M-1 for active corporations and of corporations with net income for the years 1996 to 1998 Because of changes in classifications as a result of the adoption of the North American Industrial Classification System (NAICS), industrial "sectors" for 1998 are not readily comparable to the industrial "divisions" of earlier years. As a result, 1998 is discussed separately.

Agriculture, forestry, and fishing.--With approximately one-half of the division's assets held by companies with less than $5 million in assets, these smaller, privately-held corporations are more likely to use tax accounting rules as the basis of their financial accounting, and therefore have fewer adjustments to make between book and tax net income. Pre-tax book income exceeded tax net income by $90.8 million for 1996 and $22.1 million for 1997, representing 5.1 and 1.4 percent of tax net income in those years, respectively. Excess depreciation deducted for tax purposes was $95.9 million for 1996 and $116.2 million for 1997. Each of these amounts exceeded the total amount of book-tax differences for each year. After including non-depreciation expenses, net charges against pre-tax book income were $17.6 million more than those against tax net income for 1996, and $8.3 million less for 1997. Income recognition differences were the largest source of book-tax differences, with $124.7 million more income recorded as pre-tax book income than tax net income for 1996 and $69.4 million for 1997.

Mining.--Pre-tax book income exceeded tax net income by $3.8 billion for 1996, or 35.4 percent, but reversed for 1997, leaving tax net income $0.3 billion (or 2.4 percent) higher than pre-tax book income for 1997. The net amount of additional income reported on these companies' financial books over income reported on their tax returns was $498.0 million for 1996 and $417.6 million for 1997, while tax deductions, which exceeded book expenses by $3.6 billion for 1996, reversed and were smaller than book expenses by $520.1 million for 1997. Depreciation differences were small for both years, amounting to only $58.2 million for 1996 and $8.2 million for 1997.