C Corporation Income
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Most C corporations are required to use the accrual method for tax purposes, the same method most of them use for their books. So why do book income and taxable income so often disagree? Because a handful of items are timed differently, or never counted at all, under the tax rules versus GAAP.
What creates a temporary difference between book and taxable income?
A temporary difference reverses eventually, it's a timing issue, not a permanent gap. The classic example is advance payment for rent: a tenant pays rent early, before the period it covers. Under GAAP, that cash isn't income yet; it sits as deferred revenue until it's earned. For tax purposes, the corporation generally has to include it in taxable income in the year it's received, regardless of when it's earned for books. Taxable income comes in higher than book income that year, and the difference reverses in a later year when the revenue is finally recognized for books.
The corporation isn't "cash basis" here. It's an accrual-method taxpayer running into a specific rule: certain advance payments are taxable on receipt no matter what the books say. That's a narrower, more exam-relevant fact than a blanket "C corps pay tax on cash received."
What creates a permanent difference?
A permanent difference never reverses, it's an item that's simply treated differently by GAAP and the tax code forever. Two of the most commonly tested examples:
- Interest from municipal bonds is included in book income but is never taxable.
- Life insurance premiums on a policy where the corporation itself is the named beneficiary (commonly key-person insurance) are recorded as a book expense but are not tax-deductible. The flip side of the same rule: if the corporation later collects the death benefit, those proceeds are not taxable income either.
Temporary versus permanent is the whole test here. Ask whether the item will ever show up on the other side of the ledger in a future year. If yes, it's temporary (like the rent example). If the gap between book and tax treatment never closes, it's permanent (like municipal bond interest or key-person life insurance).
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.