Small Business Forum: Implications of Book versus Tax Based Patronage in Agricultural Cooperatives
Originally published in The Cooperative Accountant, Summer 2021 Issue
A book tax difference (BTD) is the difference between book income and taxable income in a given period. BTDs arise from various accounting items that are recognized differently depending on the income basis in consideration. Taxable income represents the amount of income that is subject to taxation in accordance with IRS tax code and other statutes. Book basis income refers to the income resulting from revenues and expense are calculated in accordance with Generally Accepted Accounting Principles (GAAP). Because book income and taxable income having differing regulatory standards, some accounting items are recognized differently on a book or tax basis. BTDs can be temporary or permanent depending on the accounting item. Temporary BTDs results when an accounting items is recognized within both book and tax methods but the recognition of that item occurs at different times. A temporary BTD reverses itself once full recognition has happened on both book and taxable income basis. Permanent BTDs occur due to special accounting items that are only recognized on either a book income or taxable income basis. BTDs can also be classified as favorable or unfavorable. A favorable BTD increases the amount of a deductible expense and decreases taxable income.