Income Tax Basis of Accounting vs. GAAP

Once again, it’s time for annual financial statements to be compiled, reviewed, or audited and presented to comply with bank covenants. Banks and investors generally require year-end financials to be in accordance with generally accepted accounting principles (GAAP). While GAAP requirements are geared to best serve investors as users of financial statements, many private company users include bankers and owners who care about cash flow and ability to repay debt.

When deciding whether to employ income tax basis financial statements and GAAP, there are some key differences to consider. The basis of accounting will change based on your auditor’s opinion, but the type of opinion will stay the same. For the restaurant industry, differences between the two approaches are most noticeable with:

Lease accounting Tenant improvement allowance Closed store reserves Gift card recognition Depreciation Goodwill Purchase accountingFor example, the income tax basis of accounting requires the…