What question did this study set out to answer?

To examine how recent tax legislation and financial reporting standards impact nonpublic firms' reporting choices.

June 15, 2026

The Tax Basis Financial Reporting Alternative for Nonpublic Firms.

Key Points

To examine how recent tax legislation and financial reporting standards impact nonpublic firms' reporting choices.
Analysis of tax code changes, including the Tax Reform Act of 1986 and the Revenue Act of 1987.
Review of Financial Accounting Standards Board's SFAS 96 and its implications on tax accounting.
Evaluation of changes in financial reporting practices for small, nonpublic firms.
Tax law changes may encourage nonpublic firms to prefer tax basis reporting over GAAP.
Increased complexity due to tax legislation impacts reporting methods.
Specific provisions in the Tax Reform Act and SFAS 96 necessitate alterations in accounting practices.

Abstract

Abstract This article reports that recent changes in tax legislation and financial reporting standards in the U.S. may induce small, nonpublic corporations to prefer the tax basis of financial reporting to financial statements prepared in accordance with generally accepted accounting principles. The Tax Reform Act of 1986 was the most sweeping change in income taxation since its inception in 1913. The Revenue Act of 1987 clarified and expanded many of the Tax Reform Act provisions. In December 1987 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 96 (SFAS 96), "Accounting for Income Taxes," requiring firms to adopt the liability method of accounting for deferred taxes. Tax code changes in the minimum tax, rules for capitalization of inventory costs, long-term contract accounting, tax rates, and choice of tax year may force firms to alter financial accounting and reporting methods. Taken together, The Tax Reform Act, the Revenue Act, and SFAS 96 increase the complexity of both tax accounting and financial reporting.

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