Major Differences Between Net Income for Accounting Purposed and for Federal Income Taxes.

Abstract Present federal income taxes are based on the Sixteenth Amendment to the Constitution giving the U.S. Congress the power "to lay and collect taxes on incomes from whatever source derived, without apportionment among the several States and without regard to any census or enumeration." Simple as the amendment appears to be, the question of "what is income" has become the subject of limitless disagreement among Congressmen, taxpayers, accountants, lawyers, and representatives of the Bureau of Internal Revenue. The very term "income tax" implies that the tax is to be on income and that receipts which are not income are not to be taxed. There is also ample evidence to indicate that it has been the intention of Congress to levy the tax, with minor statutory exceptions, on only true net income as determined by the application of sound accounting procedure. Nevertheless, a gap has always existed between net income as computed for federal tax purposes and as determined according to generally accepted accounting principles for business purposes. That breach appears to be gradually widening and has already reached such proportions that business is experiencing considerable difficulty in keeping records that arc adequate for both needs. The goal of business accounting is to arrive at as nearly correct an approximation of the results of operations for each business unit as is possible.