GAAP v.s. Tax

[Maria]

Hello,

I am preparing a PRE-IPO biotech company's return. The audited financial statements are on GAAP basis. On the balance sheet, there are large amounts of prepaid and accrual expenses/liabilites. Most of the prepaids are prepaid rent, insurance, etc. The accruals include a lot of items such as accrual vacation and bonus; but the very large items come from journal entries like this:

Legal IP XXXXXX
Accrual Liability XXXXXX
Also, there are journal entries like this:
Stock basis compensation(FAS 123 R) XXXXXX
Paid in Capital XXXXXX

Consultant Service XXXXXX
Stock Granted for services(equity) XXXXXX

My co-worker told me that the prepaids are to amortized over 12 months. I disagree. He also told me that stock-basis compensation and all the accruals are not deductible. I am not very sure. For expenses that have the credit side as equity, he said not deductible either. I am just totally loss. I haven't done a M-1 reconciliation like this.

By the way, the accounting method as shown on the tax return is accrual.

As always, thanks in advance for your help.

Maria

[Corduroy Frog]

Too broad

In reading your questions, you've really been too broad, and I for one have been overwhelmed trying to address such a vast subject area.

Can you narrow it down somewhat?

For example, accruals are not universally deductible, even though GAAP may require the expense to be recognized. In general, a liability must be paid by the due date of the tax return, or in the ordinary course of business in order for the related expense to be deductible.

[outwest]

I think the key on this..

is like the old saying: Eat a elephant one bite at a time.

Do the tax return page 1 then lay it up side by side to the GAAP statement. For each difference, determine if it goes to the M-1 or was simply missed on another form. When that one is resolved, move on to the next.

I sometimes let myself get focused on getting the end figure to match when methodically working through the steps will get it done faster.

FWIW

[Maria]

I am Still Thinking

Hello,

Thanks for the input.

I guess I didn't know what I was asking - I am just wondering, on the P & L, those expenses that do not required disbursement of cash, i.e., expenses that posted to liability or equity, should I deduct them. I guess I just have to go one by one - if they were paid by the due date of the tax return or incurred during the course of business.

Thanks again,

Maria