Since April 15 has come and gone for another year, I thought a post related to taxes was fitting today. Did you know that corporations file two income reports?

A publicly traded corporation will file a balance sheet, an income statement and a statement of cash flows with the Securities and Exchange Commission (SEC) as per SEC requirements dictating the rules for report preparation and filing timelines. That same corporation will file a income tax return with the Internal Revenue Service (IRS). So, the corporation will create an income statement and an income tax return.

Generally accepted accounting principles (GAAP) dictate the proper creation of the income statement and this report is primarily for the investment (stockholders) and lending community. Without getting technical, the income statement for shareholders/lenders measures income differently than the income that is measured for the IRS via the corporation’s tax return. The IRS code rather than the GAAP code dictates the proper creation of the tax return.

The needs of the IRS differ from the needs of the shareholder/lender (market) and thus rules vary relative to the two reports in order to satisfy the needs. Shareholder/lenders need income reported in a manner to help them predict what future cash flows might be while the IRS needs to collect on the growth that has already been “realized.”