Corporations measure income for financial reporting and income tax purposes, and the objectives of these measurements differ. Income measures for financial reporting purposes should help financial analysts to assess the firm’s future ability to generate cash. Income measures for income tax purposes, on the other hand, must comply with the relevant provisions of the Internal Revenue Service (IRS) tax code. IRS regulations reflect the objectives of government fiscal policy, rather than the objectives of financial analysis and reporting.
More on Financial Accounting and Income Taxes