Book income measures your business’s financial performance, but it doesn’t always line up with your business’s taxable totals. Sometimes, you need to adjust your book income to accurately report your taxable income. However, the process requires some effort. These changes are called “book to tax adjustments” and they’re complicated. However, you can learn how to use this accounting tool with a little studying. Lucky for you, we laid all the basics out in this simple report to help you get through it.
What are Book-to-Tax Adjustments?
It is important for all businesses to maintain records, however, a business’s tax records may vary from the records that are maintained for business purposes. For example, the income viewed on your business records can be used to attract investors, but it isn’t necessarily the income you will be taxed on. This is where the adjustments come into play. Some common adjustments include:
- Depreciation and amortization
- Allowances for doubtful accounts
- Inventory reserves that are excessive or obsolete
- Travel and meals
- Accrued accounts
How to Make a Book to Tax Adjustment
Use Schedule M-1 to report book-to-tax adjustments. If you use accrual accounting, this process is more complicated. For example, if you received payment for a project in December 2019 but didn’t begin work until February 2020, the income is part of the 2020 tax year. As a result, you have to adjust your taxable earnings for 2019.
The first step is to total all taxable income, next you will want to offset this with your expenses. These adjustments can include your depreciation or any carryovers from previous tax years. The total is your net income and you use it to determine your tax liability.
Are Book-to-Tax Adjustments Important?
These adjustments are important because they affect your tax liability. Failure to accurately calculate book to tax adjustments can cause big problems down the road. The IRS might want to look at your records if they notice any major discrepancies. You should plan ahead so your book to tax adjustments line up correctly. Putting it off until the last minute is stressful and could result in mistakes.
More Accounting Questions?
Book-to-tax adjustments are confusing, so there’s no shame in needing professional help. Tax planning takes place all year, so having a solid strategy is imperative. The expert team at Shared Economy Tax can help you put together a customized tax plan for your business. We can help you minimize your tax bill and much more. Don’t worry, it’s easy to get started. Click here to set up a free one-on-one strategy session with a Shared Economy Tax pro today. You can also sign up for our newsletter using the form below for more free tax tips.