Your profit and loss statement reports one number, while your business tax return appears to report another. That difference is a question to investigate, not automatic evidence that either document is wrong.
The right comparison depends on the entity, reporting period, accounting basis and specific line being compared. A business accountant should be able to explain the path between the books and the return rather than ask you to accept an unexplained difference.
Make sure you are comparing the right figures
Start with the same business and period. A draft report printed before the year-end adjustments may differ from the final records used for filing. Ask which version was used and keep that version with the completed return.
Also identify the return line. A total on one schedule may not represent every income or deduction item reported elsewhere. Different entity returns use different structures; there is no single comparison that works for every company.
Separate accounting treatment from tax treatment
A recorded expense does not automatically receive identical treatment for tax purposes. Some differences involve the period in which an amount is recognized; others involve whether or how much is deductible.
For example, the accounting and tax treatment of equipment may differ. The IRS depreciation overview describes rules for recovering qualifying property costs. The appropriate treatment depends on the facts; this is not a promise that a particular purchase produces an immediate deduction.
Understand separately reported items
For an S corporation, some items are reported separately from ordinary business income. The Form 1120-S instructions explain the return’s schedules and reconciliation requirements. Comparing the bottom of a profit and loss statement with a single return line can therefore leave out part of the picture.
Your accountant should identify which differences apply to your business. Do not copy another company’s adjustment list or assume that a reconciliation schedule is required in every situation.
Request a plain-English explanation
Ask for the starting book figure, the material adjustments and the resulting tax figure, with the relevant return lines identified. Where an item is reported separately, ask where to find it. This explanation can be concise without being vague.
Useful questions include: Was this an error correction or a tax adjustment? Does it affect future periods? Should an entry go into the accounting system, or is it maintained only in the tax workpapers? Who will post any approved accounting entries?
Keep the final records consistent
Do not overwrite the books simply to make one number match the tax return. Save the final reports and adjustment explanations. If new information arrives later, tell the preparer rather than silently changing the filed-period records.
A simple way to organize the explanation
Use three columns: the item, why it differs, and where the treatment is documented. For equipment, for instance, the explanation might point to the accounting depreciation record and the tax depreciation schedule. For a correction to an omitted transaction, it might point to an approved bookkeeping entry instead. Those are different kinds of changes and should not be lumped together.
This is about explaining the return, not forcing the books to produce a preferred tax result. Profit versus cash available is a separate question about cash movement.
Accounting and tax preparation that connect
Go Tax Dude provides small business accounting and business tax preparation in Port Washington. Our CPA and EA team can discuss your records, reporting needs and the scope of support appropriate for your business.
Book a consultation and tell us which reports you are trying to understand. Send financial documents securely when requested, not through a public website comment.
General educational information, not individualized tax, accounting or legal advice. Treatment and requirements depend on the facts and applicable rules.