Common Tax Adjustments Between Accounting Profit and Taxable Profit
- Brian R. Schobel, CPA
- 15 minutes ago
- 2 min read
Introduction
Many small business owners are surprised when their taxable profit doesn’t match the profit shown in their accounts. This is normal. Accounting profit follows bookkeeping rules, while taxable profit follows tax laws. Understanding these common adjustments can help you avoid unwelcome surprises, ensure compliance, and plan your business's finances better.
Why Are Adjustments Needed?
Accounting records aim to show business performance accurately. Tax rules, on the other hand, focus on what income should be taxed and what expenses are allowed. The gap between the two creates tax adjustments.
Common Tax Adjustments You Should Know
Expenses Not Allowed for Tax
Some costs are valid in your accounts but not deductible for tax, such as entertainment, meals or personal expenses mixed into the business.
Depreciation Differences
In accounting, assets are depreciated based on useful life. For tax, governments often set fixed rates or methods. Accounting depreciation is added back, and tax depreciation is claimed instead.
Provisions and Estimates
Expenses like provisions for bad debts or future repairs may reduce accounting profit, but tax rules often allow them only when the expense actually happens.
Income Tax Expense
Income tax shown in the accounts is never deductible for tax purposes and must be added back.
Timing Differences
Some income or expenses are recognized at different times for accounting purposes than for tax purposes, such as accrued income or prepaid expenses.
What Small Business Owners Can Do
Review expenses regularly to spot non-deductible items
Keep clear records separating business and personal costs
Plan ahead instead of waiting until tax filing season
Conclusion
Understanding common tax adjustments helps you manage cash flow, avoid last-minute stress, and stay compliant. If the numbers don’t seem to add up, it’s a good time to ask your accountant. A short conversation before year-end can save time, money, and confusion—making tax season far more predictable and less stressful.
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