Cash Basis and GAAP

[Edsel]

If a taxpayer chooses to pay tax on a cash basis, but also wishes to follow GAAP,  I'll continue with what I THINK should happen.  I may have posted this before but not sure I got answers I could wrap my arms around.

Usually there is a large book-to-tax difference.  GAAP does not allow cash accounting so the entire amount of tax must be expensed even though it is not paid.  The difference in taxes must be analyzed to separate permanent differences from timing differences.  The full amount of timing differences must be shown as a liability called "deferred income taxes."

Whether I'm correct above or not, does not bear on the following question.

What if the entity choosing taxes on cash basis but financial reporting on GAAP is a partnership or an S-corp?  There are no deferred taxes to allow, thus no liability to calculate.  But the effect is there nonetheless.  The partners/shareholders will ultimately have to deal with the taxes they avoided, and the calculation would be a different tax bracket rates.  I can't think of any way to show this effect on a K-1.

Question:  Should the deferred effect be shown anywhere on a K-1?  If so, how?
 

 

[JHAYMAKER]

IMHO

Since there is no deferred income tax on the GAAP basis books of the flow through entity, there is no book to tax adjustment to be made.

The shareholder/partner will not be taking a deduction for taxes on schedule E.

I don't believe there is anything to report on the K-1.

 

jeff

 

 

[Edsel]

Thanks for responding Jeff, and welcome to our forum.

I tend to agree with you, however, the economic reality still exists and falls upon the shareholders.  But like yourself, there appear to be no logistics to report either on the flow-through or on the K-1s.

I have noted that this topic received almost 100 views before you responded.  Could have been several reasons - many have no answer as to how to report, or they may believe no reporting is proper (as yourself).  There may have been a reluctance to enter GAAP discussions, but if we do our job correctly we must come to grips with some GAAP.  As tax preparers we don't have to know as much GAAP as a CPA, but there are reporting requirements such as reporting balance sheets and M-1s, and our customers certainly can't be expected to do these things without us.

There are people very much willing to help on our forum, as well as some great tax minds.  I am not one of them.

 

[jklcpa]

I want to clarify that the number of views is meaningless.  If I look at a topic 10 times, that is 10 views and not 10 people. Other members will view a post multiple times to view the responses, for whatever reason, and may not have the technical expertise or some other reason for not wanting to respond. The number of views would also include any "guests" or the public view the post because it comes up on internet searches, and those viewers are unable to post. I'm not sure if bots and webcrawlers are included in the views, but if they are, those would also add to the count.

[DANRVAN]

To be straight forward with you Edsel, if your clients truly need or want (which I cannot Imagine)  financial information prepared in accordance with Generally Accepted Accounting Principles, then you need to refer them to someone who is both qualified and licensed to provide that information.

GAAP is huge and encompassing.  It has nothing to do with filling in a balance sheet on form 1065 or as you say "doing our job correctly".

But FYI, you do not report deferred taxes for a pass through entity.