Summary
This guide outlines the differences between GAAP (Generally Accepted Accounting Principles) and tax basis reporting in financial reporting. It explains that GAAP is the standard in the US, primarily used by public companies, and relies on accrual accounting where income and expenses are recorded when earned or incurred. In contrast, tax basis reporting follows IRS rules, focusing on actual cash transactions, making it simpler and often preferred by smaller businesses. The document details how estimates and allowances are treated differently under both methods, with GAAP recognizing them in anticipation of future write-offs, while tax basis reporting waits until losses are realized. Additionally, it discusses how asset depreciation is handled differently, with GAAP spreading costs over the asset's useful life and tax rules favoring quicker deductions. The guide concludes by advising businesses to choose the method that aligns with their goals and needs, suggesting consultation with a CPA for a cost-benefit analysis.
