Corporations typically keep their accounting records on an accrual basis, which recognizes income when it's earned, even if the invoice hasn't been paid. However, tax returns must be completed based on the actual income received during the tax year. This creates discrepancies between the corporation's general ledger and its tax filings. You must adjust the general ledger for these timing differences to reconcile book income to tax income for a given year.
Step 1
Total all income items that are taxable in the current year but not entered into the general ledger. Add your result to the net income after taxes from the general ledger. Add the current year's federal tax expense and any capital losses that exceed the corporation's capital gains.
Step 2
Add any general ledger expenses that are not deductible in the current tax year, such as charitable contribution carryovers from a previous year, nondeductible travel and entertainment expenses or timing differences caused by using different depreciation methods on the general ledger and tax return.
Step 3
Subtract tax-exempt interest and any other income listed on the general ledger and not on the company's tax return. Subtract deductions on the tax return that are attributable to accounting income from a different year, such as depreciation differences or charitable contribution carryovers. The resulting amount is the corporation's adjusted book income before any special or net operating loss deductions. This should match the net taxable income listed on the tax return.