Thursday, April 2, 2009


Larry, my banker wants to know why the balance sheet of the tax return does not equal the balance sheet shown in my financial statements.


Many bankers get confused by this. They need to realize that the purpose of the tax return is to determine how much tax you should pay, that is all. The financial statements are used to determine your true financial position.

Tax laws are different than financial laws. In your case the reason that the tax return varied from the financial statements is that the tax law requires a different method depreciation (not even called depreciation but rather Accelerated Cost Recovery System ((ACRS)) than Generally Accepted Accounting Principles (GAAP).

Let me give you an example. The tax law allows us to depreciate $250,000 of equipment in the year of purchase. The law allows us to write off this large amount to encourage the purchase of equipment and thereby supposedly fueling the economy. In my example the net assets on the tax return due to this transaction would be $0 (Purchase of $250,000 less ACRS of $250,000). But for financial statement purposes, taking normal deprecation the asset is worth $225,000 so the financial statement would show $225,000 (purchase price of $250,000 less normal depreciation of $25,000).

I hope that this helps.

Larry Kopsa CPA