Task 203.2.2-01-06 – Part B
The amounts that a partner receives as income that has passed through the partnership will not equal the amount of that partner’s taxable income in most situations. There are many reasons that the amounts will differ. One reason would be that most companies use accrual based accounting methods to record transactions where the IRS requires a company to compute taxable income using either a modified accrual or cost basis accounting method. Another example of an issue that would cause a discrepancy between book income and taxable income is the use of Generally Accepted Accounting Principles in preparing book income and the use IRS regulations to compute taxable income. Companies are also allowed to use many different methods to depreciate assets. The IRS requires companies to use the Modified Accelerated Cost Recovery System (MACRS) to compute depreciation. These are just a few of the reasons that a partnership’s book income would differ from its taxable income and why it is necessary to reconcile the partnership’s book income to the taxable income for that partnership for tax purposes.
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