Q: What is the difference between accrual income and ordinary business income?
A: Accrual income is the net income amount reported on an accrual income statement. Ordinary business income is the term used to identify taxable business income on the business income tax returns. The two can differ greatly since IRS regulations for preparing business income tax returns differ from Generally Accepted Accounting Principles that determine accrual income.
Q: I know this isn't the main focus of today, but can you explain what the difference is between book depreciation and tax depreciation?
A: A company can use one depreciation method in preparing its accrual income and another depreciation method in preparing its business income tax returns. It may use a straight line method of depreciation in arriving at accrual net income but an accelerated depreciation method in determining its ordinary business income for tax purposes.
The straight line method will generally result in higher reported net income while accelerated depreciation will result in a lower ordinary business income for tax purposes, which translates to lower federal income tax payments on taxable profit.
When tax depreciation is greater than accrual depreciation, it gives rise to a deferred tax liability account on the accrual balance sheet.
Course overview: The Section 179 Deduction