CORPORATE 

INCOME TAX

Effective Tax Rates 

Can Differ 

Significantly from the 

Statutory Rate

Report to Congressional Requesters

May 2013

GAO-13-520

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-520, a report to 

congressional requesters 

May 2013

CORPORATE INCOME TAX

Effective Tax Rates Can Differ Significantly from 

the Statutory Rate

Why GAO Did This Study

Proponents of lowering the U.S. 

corporate income tax rate commonly 

point to evidence that the U.S. 

statutory corporate tax rate of 35 

percent, as well as its average 

effective tax rate, which equals the 

amount of income tax corporations pay 

divided by their pretax income, are 

high relative to other countries. 

However, GAO's 2008 report on 

corporate tax liabilities (GAO-08-957) 

found that nearly 55 percent of all large 

U.S.-controlled corporations reported 

no federal tax liability in at least one 

year between 1998 and 2005. 

Given the difficult budget choices 

Congress faces and its need to know

corporations’ share of the overall tax 

burden, GAO was asked to assess the 

extent to which corporations are paying 

U.S. corporate income tax. In this 

report, among other things, GAO (1) 

defines average corporate ETR and 

describes the common methods and 

data used to estimate this rate and (2) 

estimates average ETRs based on 

financial statement reporting and tax 

reporting. To conduct this work, GAO 

reviewed economic and accounting 

literature, analyzed income and 

expense data that large corporations 

report on the Schedules M-3 that they 

file with Internal Revenue Service 

(IRS), and interviewed IRS officials.

What GAO Recommends

GAO does not make recommendations 

in this report. GAO provided a draft of 

this report to IRS for review and 

comment. IRS provided technical 

comments which were incorporated as 

appropriate.

What GAO Found

Effective tax rates (ETR) differ from statutory tax rates in that they attempt to 

measure taxes paid as a proportion of economic income, while statutory rates 

indicate the amount of tax liability (before any credits) relative to taxable income, 

which is defined by tax law and reflects tax benefits and subsidies built into the 

law. Lacking access to detailed data from tax returns, most researchers have 

estimated ETRs based on data from financial statements. A common measure of 

tax liability used in past estimates has been the current tax expense—either 

federal only or worldwide (which comprises federal, foreign, and U.S. state and 

local income taxes). The most common measure of income for these estimates 

has been some variant of pretax net book income. GAO was able to compare 

book tax expenses to tax liabilities actually reported on corporate income tax 

returns.

For tax year 2010 (the most recent information available), profitable U.S. 

corporations that filed a Schedule M-3 paid U.S. federal income taxes amounting 

to about 13 percent of the pretax worldwide income that they reported in their 

financial statements (for those entities included in their tax returns). When foreign 

and state and local income taxes are included, the ETR for profitable filers 

increases to around 17 percent. The inclusion of unprofitable firms, which pay 

little if any tax, also raises the ETRs because the losses of unprofitable 

corporations greatly reduce the denominator of the measures. Even with the 

inclusion of unprofitable filers, which increased the average worldwide ETR to 

22.7 percent, all of the ETRs were well below the top statutory tax rate of 35 

percent. GAO could only estimate average ETRs with the data available and 

could not determine the variation in rates across corporations. The limited 

available data from Schedules M-3, along with prior GAO work relating to 

corporate taxpayers, suggest that ETRs are likely to vary considerably across 

corporations.

Comparison of Alternative Measures of Average Effective Tax Rates for Schedule M-3 Filers, 

Tax Year 2010 

View GAO-13-520. For more information, 

contact James R. White at (202) 512-9110 or 

whitej@gao.gov. 
Page i GAO-13-520 Corporate Income Tax

Letter 1 

Background 4

Past Studies Estimating Corporate Effective Tax Rates Used a 

Range of Data Sources and Methodologies for a Variety of 

Reasons 9

The Average Effective Tax Rates for Profitable Large Corporations 

Were Well Below the Statutory Rate and Well Below the 

Effective Rates for All Large Corporations in Tax Years 2008 

through 2010 14

Financial and Tax Reporting Differ in Terms of Entities Included, 

Fundamental Treatment of Other Items, and Periods in which 

Certain Income and Expense Items Are Recorded 19

Agency Comments 25

Appendix I Summary of Selected Past Estimates of Average Effective 

Tax Rates Based on Financial Statement Data 27

Appendix II Copy of IRS Form 1120, Schedule M-3 (Tax Year 2010) 30

Appendix III Detailed Data on Book-Tax Differences for Tax Year 2010 33

Appendix IV Descriptions of Income and Expense Items with the Largest 

Book-Tax Differences 35

Appendix V GAO Contact and Staff Acknowledgments 37

Tables

Table 1: Data for Largest Book-Tax Differences for Part II Income 

Items 33

Table 2: Data for Largest Book-Tax Differences for Part III 

Expense Items 33

Contents 
Page ii GAO-13-520 Corporate Income Tax

Figures

Figure 1: Federal Tax Revenues as a Percentage of Total Receipts, 

1950 to 2012 (2013 to 2018 Estimated) 5

Figure 2: Federal Tax Revenues as a Percentage of GDP, 1950 to 

2012 (2013 to 2018 Estimated) 6

Figure 3: A Comparison of Income Reported in Financial 

Statements and on Tax Returns by Profitable and 

Unprofitable Schedule M-3 Filers for Tax Year 2010 13

Figure 4: Average Federal Effective Tax Rates for Varying 

Populations of Schedule M-3 Filers and Definitions of the 

Effective Tax Rate, Tax Years 2008 through 2010 16

Figure 5: Average Worldwide Effective Tax Rates for Varying 

Populations of Schedule M-3 Filers and Definitions of the 

Effective Tax Rate, Tax Years 2006 through 2010 18

Figure 6: Adjustments Reported on Schedule M-3, Part I to 

Determine Net Book Income of All Entities Included in 

Tax Return, Tax Year 2010 20

Figure 7: Largest Book-Tax Differences for Income Items in 

Schedule M-3 Part II, Tax Year 2010 22

Figure 8: Largest Book-Tax Differences for Expense Items in 

Schedule M-3 Part III, Tax Year 2010 24

Figure 9: Average Effective Tax Rates for Selected Studies on U.S. 

Companies, Using Worldwide Pretax Net Book Income 28

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page 1 GAO-13-520 Corporate Income Tax

441 G St. N.W.

Washington, DC 20548

May 30, 2013

The Honorable Carl Levin

Chairman

Permanent Subcommittee on Investigations

Committee on Homeland Security 

 and Governmental Affairs

United States Senate

The Honorable Tom Coburn, M.D.

Ranking Member

Committee on Homeland Security 

 and Governmental Affairs

United States Senate

Proponents of lowering the U.S. corporate income tax rate commonly 

point to evidence that the U.S. statutory federal corporate income tax rate 

of 35 percent, as well as its average effective tax rate (ETR), which 

equals the amount of income tax corporations pay divided by their pretax 

income, are high relative to other countries. However, our 2008 report on 

corporate income tax liabilities found that nearly 55 percent of all large 

U.S.-controlled corporations reported no federal tax liability in at least one 

year between 1998 and 2005.1

Statutory tax rates provide only a limited measure of the share of income 

that businesses pay in taxes because many other aspects of the tax 

system, such as exemptions, deferrals, tax credits, and other forms of 

incentives, also determine the amount of tax that a business ultimately 

pays on its income. The average effective tax rate reflects the combined 

effects of all these tax system components. However, obtaining the data 

to calculate ETRs is challenging. The two typical sources, tax returns and 

financial statements, both have limitations.

Given the difficult budget choices Congress faces and its need to know

corporations’ share of the overall tax burden, you asked us to assess the 

extent to which corporations are paying U.S. corporate income tax. In this 

 

1

GAO, Tax Administration: Comparison of the Reported Tax Liabilities of Foreign- and 

U.S.-Controlled Corporations, 1998-2005 (Washington, D.C.: July 24, 2008).

 
 

Page 2 GAO-13-520 Corporate Income Tax

report, we (1) explain the definition of average corporate ETR and the 

common methods and data used to estimate this rate, (2) estimate 

average ETRs based on financial statement reporting and tax reporting, 

and (3) describe the largest sources of the differences in income reported 

on financial statements and tax returns.

To explain how the average corporate effective tax rate is defined and to 

describe the common methods and data used to estimate this rate, we 

reviewed and summarized the relevant economic literature. (See app. I 

for a summary of past studies that used financial statement data to 

estimate average effective tax rates.)

To report what available data indicate about the difference between 

average effective tax rates based on financial statement reporting versus 

those based on tax reporting, we computed a variety of such rates using 

income and expense data that large corporations report on the Schedules 

M-3 that they file with the Internal Revenue Service (IRS). (These 

schedules reconcile income and expense amounts the corporations 

report for financial statement purposes to amounts they report for tax 

purposes.) These data, which the joint Treasury-IRS M-3 First Look Team 

compiles for a large sample of taxpayers, enabled us to estimate and 

compare U.S. and worldwide effective tax rates on worldwide income 

using only financial statement data; U.S. effective tax rates on worldwide 

income using only data reported for tax purposes; and U.S. and 

worldwide effective tax rates on worldwide income using income data 

from financial statements and tax return data for the amount of taxes 

paid.2

 

2

The measure of worldwide income from the Schedule M-3 represents the worldwide 

financial statement income of the U.S. corporation filing the M-3 and any entities included 

in its tax return. 

Our estimates of effective tax rates are limited to corporations with 

assets of $10 million or more (which are the ones that file Schedule M-3) 

and primarily to tax years 2008 through 2010 because those are the only 
 

Page 3 GAO-13-520 Corporate Income Tax

years for which IRS has compiled data separately for corporations that 

had nonnegative values for net income on their financial statements.3

To identify common differences between financial statement reporting 

and tax reporting, we reviewed the relevant economic and accounting 

literature and obtained data from IRS on the dollar magnitude of those 

differences that are reported in detail on Schedule M-3. The data we 

report on differences between financial statement and tax return items 

cover tax years 2006 through 2010. While there are limitations to the data 

provided on the Schedule M-3 and general reporting problems with tax 

return data, we determined that the data were reliable for our purposes 

after reviewing relevant documentation and discussing quality control 

procedures with IRS officials.

We conducted our work from March 2012 to May 2013 in accordance with 

all sections of GAO’s Quality Assurance Framework that are relevant to 

our objectives. The framework requires that we plan and perform the 

engagement to obtain sufficient and appropriate evidence to meet our 

stated objectives and to discuss any limitations in our work. We believe 

that the information and data obtained, and the analysis conducted, 

provide a reasonable basis for any findings and conclusions in this 

product.

 

3

The Schedule M-3 data are drawn from IRS’s Statistics of Income division’s annual 

stratified random samples of corporate tax returns. The results we present based on these 

samples are subject to sampling error. We do not have the detailed information needed to 

estimate the size of the sampling error; however, we believe these errors are negligible 

because a significant proportion of the Schedule M-3 filers is sampled at a 100 percent 

rate and the remaining M-3 filers are sampled at rates of 27 percent or more. Those 

sampled at the 100 percent rate accounted for 99 percent of the total assets of this 

population for 2010. The data sets for the Schedule M-3 differ from the Statistics of 

Income corporate sample data sets in that only returns reporting assets of $10 million or 

more are considered in the Schedule M-3 data sets, and returns that do not meet simple 

reconciliation rules between M-3 Parts I and II and between M-3 Parts III and II are 

dropped from those data sets. Our analysis excludes pass-through entities, which do not 

pay income tax. Their income is passed through to their shareholders or partners where it 

is taxed under applicable income tax. [Pass through entities include partnerships, which 

do not have shareholders. Also, corporations or other entities can be partners or 

shareholders in pass through entities.]
 

Page 4 GAO-13-520 Corporate Income Tax

The base of the federal corporate income tax includes net income from 

business operations (receipts, minus the costs of purchased goods, labor, 

interest, and other expenses). It also includes net income that 

corporations earn in the form of interest, dividends, rent, royalties, and 

realized capital gains. The statutory rate of tax on net corporate income 

ranges from 15 to 35 percent, depending on the amount of income 

earned.4 The United States taxes the worldwide income of domestic 

corporations, regardless of where the income is earned, with a foreign tax 

credit for certain taxes paid to other countries. The timing of the tax 

liability depends on several factors. For example, income earned not by 

the domestic corporation, but by a foreign subsidiary is generally not 

taxed until a distribution—such as a dividend—is made to the U.S. 

corporation.5

At about $242 billion, corporate income taxes are far smaller than the 

$845 billion in social insurance taxes and $1.1 trillion in individual income 

taxes that the Office of Management and Budget (OMB) estimates were 

paid in fiscal year 2012 to fund the federal government.6

 

4

26 U.S.C. § 11. In addition, present law imposes an alternative minimum tax (AMT) on 

certain corporations to the extent that their minimum tax liability exceeds their regular tax 

liability. 26 U.S.C. § 56. In general, the AMT applies a lower tax rate to a broader tax 

base. Specifically, the regular tax base is increased for AMT purposes by adding back 

certain items treated as tax preferences and disallowing certain deductions and credits. 

Also, marginal rates are higher over limited income ranges to recapture the benefits of the 

rates below 35 percent.

Figure 1 shows 

the relative distribution of federal taxes.

5 Taxable income is total income, including taxable income from foreign sources, minus 

deductions such as for salaries and wages, depreciation, and net operating loss 

carryovers. The next step is to calculate the tentative tax owed (taxable income times the 

applicable rate). The last step is to subtract any tax credits, including the foreign tax credit, 

to get the taxes owed.

6

Office of Management and Budget, Historical Tables, Budget of the United States 

Government, Fiscal Year 2014 (Washington, D.C.: Apr. 2013). 

Background

Corporate Income Tax
 

Page 5 GAO-13-520 Corporate Income Tax

Figure 1: Federal Tax Revenues as a Percentage of Total Receipts, 1950 to 2012 

(2013 to 2018 Estimated)

Figures 1 and 2 show the trend in corporate income tax revenues since 

1950. According to tax experts, corporate income tax revenues fell from 

the 1960s to the early 1980s for several reasons. For example, corporate 

income became a smaller share of gross domestic product (GDP) during 

these years, partly due to the fact that corporate debt, and therefore 

deductible interest payments, increased relative to corporate equity, 

reducing the tax base. In addition, tax expenditures, such as more 

generous depreciation rules also grew over that period.7

 

7

C. Eugene Steuerle, Contemporary U.S. Tax Policy (Washington, D.C.: The Urban 

Institute Press, 2004); and Jane G. Gravelle, “The Corporate Tax: Where Has It Been and 

Where Is It Going?” National Tax Journal, vol. 57, no. 4 (2004): 903-23.

Since the early 

1980s, the corporate income tax has accounted for about 6 to 15 percent 
 

Page 6 GAO-13-520 Corporate Income Tax

of federal revenue. Consequently, although not the largest, it remains an 

important source of federal revenue. Relative to GDP, the corporate 

income tax has ranged from a little over 1 percent to just under 2.7 

percent during those same years, as shown in figure 2. The 

Congressional Budget Office (CBO) recently projected that despite the 

recent uptick, corporate income tax revenue for the next 10 years as a 

percentage of GDP is expected to stay within this same range.8

Figure 2: Federal Tax Revenues as a Percentage of GDP, 1950 to 2012 (2013 to 2018 

Estimated)

 

8

Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2013-

2023 (Washington, D.C.: February 2013).
 

Page 7 GAO-13-520 Corporate Income Tax

Businesses operating as publicly traded corporations in the United States 

are required to report the income they earn and the expenses (including 

taxes) they incur each year according to two separate standards. First, 

they must produce financial statements in accordance with generally 

accepted accounting principles (GAAP), based on standards established 

by the Financial Accounting Standards Board. Income and expense items 

reported in these statements are commonly known as book items. 

Second, in general, domestic corporations, including publicly traded 

corporations, must file corporate income tax returns on which they report 

income, expenses, and tax liabilities according to rules set out in the 

Internal Revenue Code (IRC) and associated Department of Treasury 

regulations.9

The IRC generally requires that a corporation’s taxable year and overall

method of accounting conform to those used for financial reporting 

purposes. However, many specific differences are permitted (and, in 

some cases, required) between financial accounting and tax accounting. 

The differences are referred to as book-tax differences. The primary 

purpose of financial reporting is to provide GAAP information to investors 

and creditors, recognizing that some of that information must be based on 

judgment and estimates.10

 

9

Except as otherwise noted, references to tax accounting refer to this second set of rules.

Also, unless otherwise noted, we use the term taxes actually paid in reference to the 

income tax liabilities (after credits) that corporations report on their federal income tax 

return each year.

In contrast, the primary purpose of tax 

accounting is to measure income for the purpose of imposing the federal 

income tax. Tax reporting rules incline towards objectivity, 

administrability, and consistency among taxpayers. The tax code is also 

used as a fiscal and social policy tool, incorporating incentives to 

encourage certain taxpayer behaviors, such as investment and research. 

Such incentives generally cause deviations between book income and 

taxable income. In addition, the federal income tax expenses that 

corporations report in their financial statements for a given year do not 

necessarily reflect the actual tax liabilities and payments that they 

10 The measurement of business net income is inherently difficult and some components 

of both tax and book net income are estimates subject to some imprecision. (Net income 

equals total income minus expenses.) One important source of imprecision is the difficulty 

of measuring costs associated with the use of capital assets. Both book and tax 

depreciation rules allocate capital costs over the expected useful lives of different types of 

assets. The actual useful life of specific assets may differ from the expected lives used for 

purposes of either book or tax depreciation. 

Financial and Tax 

Reporting Requirements 

for Corporations
 

Page 8 GAO-13-520 Corporate Income Tax

reported on their federal tax return for that year. In financial statements, 

income tax expense includes the estimated future tax effects attributable 

to temporary differences between book and tax income.

Prior to 2004, corporations were required to reconcile their book net 

income with tax net income reporting on Schedule M-1 of their income tax 

returns by comparing the book and tax return amounts of a limited 

number of income and expense items. Concern over the growing 

difference observed between pretax book net income and tax net income 

and the lack of detail available from the Schedule M-1 on the sources of 

these differences led to the development of the more extensive reporting 

on book-tax differences that is now required on Schedule M-3.11 One 

important concern with Schedule M-1 arose from the fact that GAAP 

governing which components of large multinational corporate groups 

need to be included in financial statements differ from tax rules that 

specify which of those components need to be included in consolidated 

tax returns. Consequently, the financial statement data that taxpayers 

reported on their M-1s could relate to a much different business entity 

from the one covered by the tax return. A Schedule M-3 filer is now 

required to report the worldwide income of the entity represented in its 

financial statements and then follow a well-defined series of steps—

subtracting out income and losses of foreign and U.S. entities that are 

included in the financial statements but not in consolidated tax returns; 

adding in the income and losses of entities that are included in 

consolidated tax returns but not in financial statements; and making other 

adjustments to arrive at the book income of tax-includible entities. The 

Schedule M-3 also requires filers to report many more specific income 

and expense items according to both financial statement and tax rules 

than the M-1 required. The items causing the largest book-tax differences 

are identified later in this report. (See app. II for a copy of the Schedule 

M-3.)

 

11These requirements, which apply to all corporations with assets that equal or exceed 

$10 million, became effective December 2004.
 

Page 9 GAO-13-520 Corporate Income Tax

Effective tax rates on corporate income can be defined in a variety of 

ways, each of which provides insights into a different issue. These rates 

fall into two broad categories—average rates and marginal rates. An 

average corporate effective tax rate, which is the focus of this report, is 

generally computed as the ratio of taxes paid or tax liabilities accrued in a 

given year over the net income the corporation earned that year; it is a 

good summary of the corporation’s overall tax burden on income earned 

during that particular period. “Burden” in this context refers to what the 

corporation remits to the Treasury, also called statutory burden. However, 

statutory burden may differ from economic burden, which measures the 

loss of after-tax income due to a tax. The economic burden of some or all 

of the taxes on a corporation may be shifted to the firm’s customers or 

workers, as well as to other firms and other workers. Any remaining 

burden is borne by the corporation’s shareholders or other owners of 

capital. A marginal effective tax rate focuses on the tax burden associated 

with a specific investment (usually over the full life of that investment) and 

is a better measure of the effects that taxes have on incentives to 

invest.12

 

12In contrast, the income included in an average effective tax rate computation may be 

derived from investments made in many different past years in addition to all those made 

in the current year; it does not include estimates of any income to be earned in the future.

Some researchers have also developed a measure they call the effective average tax 

rate, which is a weighted average of the statutory tax rate and the effective marginal tax 

rate to study the effects of taxes on decisions relating to large, discrete investments in 

contrast to those about small differences in the size of a particular investment. (See, for 

example, Michael Devereux and Rachel Griffith, “Taxes and the Location of Production: 

Evidence from a Panel of US Multinationals,” Journal of Public Economics, vol. 68 (June 

1998): 335-367.)

Effective rates differ from statutory tax rates in that they attempt 

to measure taxes paid as a proportion of economic income, while 

Past Studies 

Estimating Corporate 

Effective Tax Rates 

Used a Range of Data 

Sources and 

Methodologies for a 

Variety of Reasons

Alternative Corporate 

Effective Tax Rates Are 

Designed to Address 

Different Questions
 

Page 10 GAO-13-520 Corporate Income Tax

statutory rates indicate the amount of tax liability (before any credits) 

relative to taxable income, which is defined by tax law and reflects tax 

benefits and subsidies built into the law. The statutory tax rate of 35 

percent applying to most large U.S. corporations is sometimes referred to 

as the “headline rate,” because it is the rate most familiar to the public.

Until recently, data constraints have inhibited comparisons of effective tax 

rate estimates based on the alternative reporting systems. Access to tax 

return data is tightly restricted by law; consequently, most researchers 

who have estimated average effective tax rates for U.S. corporations 

have used either firm-level or aggregated data compiled from corporate 

financial statements for their measures of both tax liability and income. 

Even those with access to tax data could not easily determine how 

effective tax rates based on financial statements would differ from those 

based on actual tax returns because, as noted above, the scope of the 

business entity represented in a corporation’s financial statement can be 

quite different from that covered by its consolidated federal tax return.13

Researchers with access to data from Schedule M-3 and other parts of 

corporate income tax returns will now be able to directly compare 

effective tax rates based on the different data sources for a consistent 

population of large corporate income taxpayers, as we do in the following 

section.

The two essential components of a methodology for estimating an 

average effective tax rate are the measure of tax liabilities to be used as 

the numerator of the rate and the measure of income to be used as the 

denominator.

 

13George Plesko employed a labor-intensive approach to link tax return data from IRS 

with financial statement data from Compustat, using each firm’s employer identification 

number. Consolidation differences between financial statements and tax returns, along 

with other discrepancies, forced the author to drop many cases before arriving at his final 

study population of 1,116 firms. (George A. Plesko, “An Evaluation of Alternative 

Measures of Corporate Tax Rates,” Journal of Accounting and Economics (2003).)

Data from Schedule M-3 of 

the Federal Corporate 

Income Tax Return Allow 

for More Accurate 

Comparisons of Effective 

Tax Rates Based on 

Alternative Reporting 

Rules

Various Measures of Taxes 

and Income Have Been 

Used to Estimate Effective 

Tax Rates
 

Page 11 GAO-13-520 Corporate Income Tax

A common measure of tax liability used in estimates based on financial 

statement data has been the current tax expense—either federal only or 

worldwide (which comprises federal, foreign, and U.S. state and local 

income taxes); however, some studies have used the total tax expense, 

and others have used cash taxes paid during the year.14 Corporations 

that filed Schedules M-3 for tax year 2010 reported a total of $185 billion 

in current U.S. federal income tax expense and $225 billion in total 

federal income tax expense, compared to the total of $187 billion in actual 

tax paid after credits that they reported owing IRS for that year.15

The typical measure of income for effective tax rate estimates based on 

financial statements has been some variant of pretax net book income. 

Figure 3 shows the value of this book income measure for corporations 

that filed Schedules M-3 for tax year 2010 and shows the separate values 

Our 

data from IRS do not include a measure of cash taxes paid.

 

14The total tax expense is the sum of current taxes and deferred taxes. Deferred taxes 

represent estimated taxes that will be paid (or refunded) in a future year as timing 

differences between book and tax reporting reverse themselves and carryforwards are 

recognized. For example when tax depreciation is more rapid than book depreciation a 

company in effect postpones part of its actual tax liability on this year’s book income 

because in the current year its net income for tax purposes (after the depreciation 

deduction) will be lower than its income for book purposes. The postponed taxes will be 

paid in later years when book depreciation deductions become larger than those for tax 

purposes. The amount of postponed taxes associated with current year income is reported 

as a deferred tax expense. Taxes which are reported as deferred in one year are included 

in current tax expenses and cash taxes paid in future years (which is why some studies 

choose to exclude them from their effective tax rate measures). The cash taxes paid, as 

reported in statement of cash flows or notes to the financial statements, represents what 

companies actually pay to the IRS in the current year; however, they do not necessarily 

relate to the current year’s income. For example, those amounts can include additional 

payments for earlier tax years resulting from IRS audit adjustments. The actual tax liability 

reported on a corporation’s form 1120 is the amount of tax that it actually owes to IRS for 

income earned in that tax year. The actual tax liability can differ from the current tax 

expense for a number of reasons, including the fact that corporations include an amount 

for “uncertain tax positions” in their current tax expenses. These amounts are not paid to 

IRS in the current year; they simply indicate to shareholders how much additional tax may 

have to be paid to IRS, such as taxes due as the result of a future audit.

15We use the term actual tax paid to refer to what corporations report as their income tax 

liability after credits on line 7 of Schedule J of Form 1120. The relationship between book 

and actual taxes can change from year to year, depending on economic conditions. For 

example the aggregate current income tax expense for Schedule M-3 filers in tax year 

2006 was $310 billion, compared to $278 billion in actual taxes paid after credits.

Tax Liability: Broader 

Measures Include Taxes 

Payable in the Future and to 

Other Governments

Income: The Treatment of 

Losses Can Significantly Affect 

Effective Tax Rate Estimates 
 

Page 12 GAO-13-520 Corporate Income Tax

for profitable and unprofitable filers.16 Profitable filers had aggregate 

pretax net book income of $1.4 trillion while unprofitable filers had losses 

totaling $315 billion, resulting in total net book income of $1.1 trillion for 

the full population.17

 

16We use the term profitable to refer to those Schedule M-3 filers that had nonnegative 

amounts for net book income reported on that schedule. To compute pretax net book 

income we start with the net book income reported in financial statements and add back in 

the total tax expense.

As these numbers suggest, average effective tax 

rates can vary significantly depending on the population of corporations 

covered by the estimate. The inclusion of unprofitable firms, which pay 

little if any actual tax, can result in relatively high estimates because the 

losses of unprofitable corporations greatly reduce the denominator of the 

effective rate. Such estimates do not accurately represent the tax rate on 

the profitable corporations that actually pay the tax. Some prior studies 

have excluded unprofitable corporations; others have not.

17In the other two years for which we had data for profitable and unprofitable filers 

aggregate losses were considerably larger. In 2009 the $619 billion of losses for 

unprofitable filers offset more than half of the $1.2 trillion of income for profitable filers, 

resulting in aggregate net income of only $568 billion. In 2008 the losses of unprofitable 

filers actually exceeded the income of profitable ones, resulting in an aggregate net loss 

for the full population.
 

Page 13 GAO-13-520 Corporate Income Tax

Figure 3: A Comparison of Income Reported in Financial Statements and on Tax Returns by Profitable and Unprofitable 

Schedule M-3 Filers for Tax Year 2010

Figure 3 also shows the value of two income measures defined by tax 

rules for the same population of taxpayers. The first measure, income 

(loss) before net operating loss deductions and special deductions, is the 

tax return measure to which Schedule M-3 filers are required to reconcile 

their net book income (we refer to this measure as net tax income). It 

represents total income minus all deductions, except for losses carried 

over from other tax years and the special deductions relating to 

intercorporate dividends. The positive values of this measure for 

profitable filers, negative values for unprofitable filers, and net value for all 
 

Page 14 GAO-13-520 Corporate Income Tax

filers are all of a lower magnitude relative to book net income.18 The final 

measure shown in figure 3 is taxable income, which equals net tax 

income minus losses carried over from other years and special 

deductions. Taxable income is higher than tax net income for the full 

population of Schedule M-3 filers, even after the additional deductions, 

because it is defined to be no less than zero. Therefore there are no 

current-year losses to offset positive income amounts. For the profitable 

subpopulation taxable income is lower than net tax income.

For tax year 2010, profitable Schedule M-3 filers actually paid U.S. 

federal income taxes amounting to 12.6 percent of the worldwide income 

that they reported in their financial statements (for those entities included 

in their tax returns). This tax rate is slightly lower than the 13.1 percent 

rate based on the current federal tax expenses that they reported in those 

financial statements; it is significantly lower than the 21 percent effective 

rate based on actual taxes and taxable income, which itself is well below 

the top statutory rate of 35 percent.19 The relatively low federal effective 

tax rate cannot be explained by income taxes paid to other countries. 

Even when foreign, state, and local corporate income taxes are included 

in the numerator, for tax year 2010, profitable Schedule M-3 filers actually 

paid income taxes amounting to 16.9 percent of their reported worldwide 

income.

 

18Some of this difference is due to the fact that some of the filers that were categorized as 

profitable on the basis of their book net income actually had negative tax net income, 

which offsets some of the positive tax net income for that subpopulation. The converse is 

true for the subpopulation of unprofitable filers. Also, net tax income reflects the deduction 

of state and local income taxes and foreign taxes that are deducted (rather than offset by 

credits); pretax book income is before these deductions.

19The book taxes and incomes that we obtained from the Schedule M-3 data represent 

the totals for entities included in the filers’ tax returns. These amounts can be different 

from the totals reported in publicly available financial statements due to differing 

consolidation rules for book and tax purposes, which are discussed in the following 

section.

The Average Effective 

Tax Rates for 

Profitable Large 

Corporations Were 

Well Below the 

Statutory Rate and 

Well Below the 

Effective Rates for All 

Large Corporations in 

Tax Years 2008 

through 2010
 

Page 15 GAO-13-520 Corporate Income Tax

All of the effective tax rates based on book income for profitable filers are 

lower than the equivalent measures computed for all Schedule M-3 filers, 

shown on the right side of figure 4, because the inclusion of losses 

reduces the aggregate income for all Schedule M-3 filers. This difference 

was particularly large for tax year 2009 because the aggregate losses of 

unprofitable filers were considerably larger in that year than in 2010.20

 

20This fact explains how it is possible that during an economic downturn the number of 

corporations not paying taxes can increase at the same time that estimated average 

effective tax rates increase.

Aggregate book losses were even larger for tax year 2008; however, 

because these losses more than offset the income of profitable 

corporations, resulting in an overall net loss, we could not compute 

meaningful average effective tax rates based on book income for all 

corporations for that year.

The Average Effective Tax 

Rates Based on Book 

Income Are Lower When 

Unprofitable Corporations 

Are Excluded
 

Page 16 GAO-13-520 Corporate Income Tax

Figure 4: Average Federal Effective Tax Rates for Varying Populations of Schedule M-3 Filers and Definitions of the Effective 

Tax Rate, Tax Years 2008 through 2010

Note: The measure of pretax net book income used in computing these rates is equal to worldwide 

net book income plus the total tax expense. 

With access to only aggregated data, we were not able to provide any 

information on the distribution of effective rates across individual filers; 

however, past work we have done suggest that there could be significant 
 

Page 17 GAO-13-520 Corporate Income Tax

variation in effective rates across taxpayers.21 Nor could we compare 

effective tax rates for different types of corporations, such as U.S. 

controlled corporations and foreign controlled corporations.

Past empirical studies comparing average effective tax rates across 

countries have focused on worldwide taxes (which add foreign and state 

and local income taxes to federal income taxes in the numerator). Our 

estimates for these worldwide rates ranged between 2 to 6 percent higher 

than the U.S. federal rates we present above, but the relationships 

between the different measures (total, current, and actual) within each 

year remained similar. (See fig. 5.) It is difficult to make close 

comparisons between our results and estimates from prior studies based 

on financial statement data because most of the latter estimates are 

averaged over multiple years for which we have no data. (See fig. 9 in 

app. I.) Our estimated rates for the full population of filers for tax year 

2010 are generally lower than the estimates presented in earlier studies 

while our estimated rates for other years are generally higher.22

 

21In an earlier study, we found considerable variation in the U.S. effective tax rate on the 

domestic income of large corporations for tax year 2004. At one extreme, 32.9 percent of 

the taxpayers had effective rates of 10 percent or less, and at the other extreme, 25.6 

percent of taxpayers had effective rates over 50 percent (GAO, U.S. Multinational 

Corporations: Effective Tax Rates Are Correlated With Where Income Is Reported, 

GAO-08-950 (Washington, D.C.: Aug. 12, 2008)). Moreover, in another study, we found

that for tax year 2005 about 19 percent of the foreign-controlled domestic corporations 

that did not pay federal income tax and about 27 percent of the U.S.-controlled domestic 

corporations that paid no tax had positive net tax income (before loss carryforwards and 

special deduction). These corporations had ETRs of zero, which could have significantly 

reduced the average ETR for the population of profitable corporations. (GAO, Tax 

Administration: Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled 

Corporations, 1998-2005, GAO-08-957 (Washington, D.C.: July 24, 2008).

22Five out of the ten effective tax rate estimates shown in fig. 9 were computed for 

populations that excluded all corporations with negative book income. 

The Average Effective Tax 

Rates for Profitable 

Corporations Were Well 

Below the Federal 

Statutory Rate Even When 

Foreign and State and 

Local Income Taxes Were 

Included
 

Page 18 GAO-13-520 Corporate Income Tax

Figure 5: Average Worldwide Effective Tax Rates for Varying Populations of Schedule M-3 Filers and Definitions of the 

Effective Tax Rate, Tax Years 2006 through 2010

Note: The denominator for all of the effective tax rates in this figure is pretax worldwide net book 

income. The measure “Primarily actual taxes paid” equals the sum of actual U.S. federal and state 

and local income taxes paid, as reported on federal tax returns, plus the current foreign tax expenses 

and foreign withholding tax expenses from financial statements. We use the book amounts for foreign 

taxes paid, rather than the tax return amounts, because the latter does not include all of the foreign 

taxes paid on foreign income. 
 

Page 19 GAO-13-520 Corporate Income Tax

As noted above, it can be difficult to compare financial statements with 

tax returns because entities included under each type of reporting can 

differ.

23 IRS developed Schedule M-3 Part I to help delineate book-tax 

differences related to consolidation and to standardize the definition of the 

financial, or book, income of the tax consolidated group. As shown in 

figure 6, for tax year 2010 Schedule M-3 filers reported that they earned a 

total of $1.3 trillion from U.S. and foreign entities that were included in 

their consolidated financial statement but not in their consolidated tax 

returns (which, therefore, had to be subtracted out on the Schedule M-3). 

They also reported $420 billion in losses from such entities. (These 

losses also had to be subtracted out, meaning that net income increased 

by $420 billion.) In contrast, they reported less than $10 billion in either 

income or losses from entities that are included in their tax returns but not 

in their financial statements. These corporations also reported $762 billion 

in positive adjustments and $20 billion in negative adjustments relating to 

transactions between excluded and included entities.24 The corporations 

must also report several other types of adjustments, such as for any 

difference between the time period covered by their financial statements 

and the period covered by their tax years, that they make in order to 

arrive at a final amount that represents the net book income or loss of all 

of their entities that are included in their tax returns. For tax year 2010, 

this population of Schedule M-3 filers reported a total of $1.1 trillion in net 

book income for entities included in their tax returns and a total of $300 

billion in losses for such entities.25

 

23The thresholds for consolidating entities are different for book and tax purposes, so the 

entities included under each can differ.

24For example, adjustments are made to reverse the elimination of intercompany 

dividends involving entities removed at an earlier point on the schedule.

25The difference between this final income measure and the first income measure shown 

in fig. 3 is that this measure is after subtracting the total book tax expense, while the fig. 3 

measure is before that subtraction.

Financial and Tax 

Reporting Differ in 

Terms of Entities 

Included, 

Fundamental 

Treatment of Other 

Items, and Periods in 

which Certain Income 

and Expense Items 

Are Recorded
 

Page 20 GAO-13-520 Corporate Income Tax

Figure 6: Adjustments Reported on Schedule M-3, Part I to Determine Net Book Income of All Entities Included in Tax Return, 

Tax Year 2010

Schedule M-3 Parts II and III report book-tax differences related to 

income and expenses, respectively, for the tax consolidated group only. 

The largest category of differences for both income and expense items 

was “other.” IRS officials told us that their reviews of the detailed 

documentation that filers are required to submit along with their 

Schedules M-3 indicate three broad subtypes of reporting in these other 

categories:

1. Some common income and expense categories have no line of their 

own on the M-3, so they have to be reported as other. This was the 

case for research and development expenses prior to 2010; those 

expenses now have their own line.

2. Taxpayers report miscellaneous items in these categories but do not 

provide details on what they include.
 

Page 21 GAO-13-520 Corporate Income Tax

3. Taxpayers record items in these categories that clearly should have 

been reported on more specific lines of the M-3. The officials 

suggested some taxpayers do this because they do not take the time 

or trouble to fill out the form properly; others may be trying to hide 

details from the IRS.

As a consequence, there is over-reporting in the two “other” categories 

and under-reporting in some of the more specific categories. Figures 7 

and 8 identify the 10 largest categories of book-tax differences for both 

income and expense items in tax year 2010.26

Book-tax differences caused by the inclusion of an income or expense 

item by one accounting system but not the other are known as permanent 

differences. One of the largest permanent book-tax income differences 

reported in tax year 2010 arose from the section 78 gross-up, as shown in 

figure 7. Section 78 of the IRC requires U.S. corporations electing to 

claim the foreign tax credit to gross-up (i.e., increase) their dividend 

income by the amount of creditable foreign income taxes associated with 

the dividends they received.27

 

26These categories are ranked in terms of the absolute value of the differences for all 

Schedule M-3 filers. Tables 1 and 2 in app. III show the separate dollar amounts for the 

negative and positive, temporary and permanent differences in each category, as well as 

the net difference, which offsets the negative differences against the positive differences.

Given that corporations are not required to 

make this type of adjustment for book income purposes, the amount of 

any gross-up is a permanent positive difference between tax income and 

book income.

2726 U.S.C. § 78. Section 902 of the IRC permits a U.S. corporation that owns at least 10 

percent of the voting stock of a foreign corporation to take an indirect credit for foreign 

income taxes associated with dividends that it receives from that foreign corporation. 26 

U.S.C. § 902.
 

Page 22 GAO-13-520 Corporate Income Tax

Figure 7: Largest Book-Tax Differences for Income Items in Schedule M-3 Part II, Tax Year 2010

Note: Within some of these categories a single filer can have both negative and positive amounts 

(e.g., positive income from some of its partnerships and losses from other partnerships). The 

aggregate positive differences shown for each category in this figure represent the sum of the net 

positive differences across those M-3 filers with net positive amounts in the particular category. 

Similarly, the negative differences represent the sums across all filers with net negative differences. 
 

Page 23 GAO-13-520 Corporate Income Tax

Book-tax differences caused by differences in the timing of when an 

income or expense item is recognized under each accounting approach 

are known as temporary differences because, over time, the total income 

and expense recognized for these items, as measured in undiscounted 

nominal dollars, is the same under the two systems. As shown in figure 8, 

a prominent temporary difference is depreciation. Accelerated 

depreciation generally result in depreciation deductions being reflected in 

taxable income earlier than when the depreciation expense for the same 

asset is recognized in net book income. Another significant temporary 

difference relates to losses from uncollectible receivables (e.g., bad 

debts). For book purposes, firms recognize losses on uncollectible 

receivables when the losses are probable and reasonably estimable. This 

may be applied in relation to individual receivables or groups of similar 

types of receivables, even though the particular receivables that are 

uncollectible may not be identifiable. In contrast, for tax purposes, firms 

must wait until a specific receivable is known to be uncollectible before it 

can be deducted. 
 

Page 24 GAO-13-520 Corporate Income Tax

Figure 8: Largest Book-Tax Differences for Expense Items in Schedule M-3 Part III, Tax Year 2010

Note: Within some of these categories a single filer can have both negative and positive amounts 

(e.g., tax depreciation can exceed book depreciation for some assets while the converse can be true 

for other assets). The aggregate positive differences shown for each category in this figure represent 

the sum of the net positive differences across those M-3 filers with net positive amounts in the 
 

Page 25 GAO-13-520 Corporate Income Tax

particular category. Similarly, the negative differences represent the sums across all filers with net 

negative differences. 

The magnitudes of some book-tax differences varied significantly 

between 2006 and 2010.For example, the excess of tax depreciation over 

book depreciation increased from about $69 billion in 2006 to over $145 

billion in 2010. As another example, the excess of tax income over book 

income relating to the section 78 gross-up increased from about $36 

billion in 2006 to over $77 billion in 2010.

As the details presented in figures 7 and 8 indicate, the direction of the 

book-tax differences in all of the income and expense categories varies 

across corporations. The book amount is greater for some corporations, 

while the tax amount is greater for others. As a consequence, the 

aggregate net difference in many categories (shown in tables 1 and 2 in 

app. III) are significantly smaller than the absolute value of the 

differences. Moreover, the net difference is positive for some categories 

and negative for others. The offsetting of negative and positive 

differences across categories and across corporations within categories 

means that the relatively small difference between aggregate net book 

income ($833 billion) and aggregate net tax income ($737 billion) for the 

population of Schedule M-3 filers for tax year 2010 may hide considerable 

differences between book and tax income and between effective tax rates 

based on book income and those based on tax income for individual 

corporations. Given the aggregate nature of our data, we were not able to 

examine the range of potential differences across corporations.

We provided a draft of this report to IRS on April 25, 2013, for review and 

comment. After reviewing the draft report, IRS provided technical 

comments which we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to interested congressional 

committees, the Secretary of the Treasury, the Commissioner of Internal 

Revenue, and other interested parties. In addition, the report also will be 

available at no charge on the GAO website at http://www.gao.gov. 

Agency Comments
 

Page 26 GAO-13-520 Corporate Income Tax

If you or your staff have any questions about this report, please contact 

me at (202) 512-9110 or whitej@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff who made major contributions to this report 

are listed in appendix V.

James R. White

Director, Tax Issues

Strategic Issues
Appendix I: Summary of Selected Past 

Estimates of Average Effective Tax Rates 

Based on Financial Statement Data

Page 27 GAO-13-520 Corporate Income Tax

Results from past studies, presented in Figure 9, use financial statement 

data to estimate average effective tax rates for U.S. corporations, 

employed pretax worldwide book income as the denominator of their 

effective rate, and covered at least one tax year since 2001.1 As indicated 

in the figure, these studies used a variety of measures of worldwide taxes 

for their numerator. Five of the estimates were based on data that 

excluded all corporations with negative book income.2

Other recent studies used aggregate measures of tax receipts received 

by the U.S. Treasury and profits before taxes from the Bureau of 

Economic Analysis’s (BEA) National Income and Product Account (NIPA) 

data to estimate average corporate effective tax rates.

Most of the studies 

reported their results as averages across multiple years.

3 The BEA profits 

measure is created using an aggregate income amount using tax data 

adjusted by two components: inventory valuation adjustment and capital 

consumption adjustment. Due to the aggregate nature of the profits 

before taxes, the denominator includes corporations with positive and 

negative profits before taxes. Another recent study by Citizens for Tax 

Justice and the Institute on Taxation and Economic Policy used financial 

statement data but focused on the effective rate of the federal income tax 

on U.S. domestic income, rather than worldwide taxes on worldwide 

income. They estimated a three-year (2008 to 2010) average effective tax 

rate of 18.5 percent for a sample of 280 of the largest U.S. corporations.4

 

1

These are all the studies we found as of March 2013 that met these criteria.

2

The five are: PricewaterhouseCoopers, the two Markle and Shackelfords, Lee and 

Swenson, and the second Dyreng, Hanlon, and Maydew. Costa and Gravelle, who made 

use of Schedule M-3 data, excluded corporations if both their book net income and their 

tax net income were negative. The Hanlon and Maydew estimate and the first of the 

Dyreng, Hanlon, and Maydew estimates include corporations for which the sum of their 

net income over a 10-year period was positive. 

3

See, for example, Steven Maguire, Average Effective Corporate Tax Rates: 1959 to 

2005, Congressional Research Service (Sept. 6, 2006); Martin A. Sullivan, “The Effective 

Corporate Tax Rate is Falling,” Tax Notes (Jan. 22, 2007): 280-282; and Mark P. 

Keightley, Reasons for the Decline in Corporate Tax Revenues, Congressional Research 

Service (Dec. 8, 2011).

4

Robert S. MacIntyre, Matthew Gardner, Rebecca J. Wilkins, and Richard Phillips, 

Corporate Taxpayers & Corporate Tax Dodgers 2008-10 (Washington, D.C.: Citizens for 

Tax Justice and the Institute on Taxation and Economic Policy, November 2011).

Appendix I: Summary of Selected Past 

Estimates of Average Effective Tax Rates 

Based on Financial Statement Data
Appendix I: Summary of Selected Past 

Estimates of Average Effective Tax Rates 

Based on Financial Statement Data

Page 28 GAO-13-520 Corporate Income Tax

Figure 9: Average Effective Tax Rates for Selected Studies on U.S. Companies, Using Worldwide Pretax Net Book Income

Notes: The full citations for the included studies are PricewaterhouseCoopers LLP, Global Effective 

Tax Rates (April 14, 2011); Kevin S. Markle and Douglas A. Shackelford (1), “Cross-Country 

Comparisons of Corporate Income Taxes,” National Tax Journal, vol. 65, no. 3 (2012) 493-528; 

Melissa Costa and Jennifer Gravelle, “Taxing Multinational Corporations: Average Tax Rates,” 

Symposium on International Taxation and Competitiveness, 65 Tax L. Rev. 391 (2012); Namryoung 

Lee and Charles Swenson, “Is It a Level Playing Field? An Analysis of Effective Tax Rates,” Tax 

Notes International (May 25, 2009) 685-693; Kevin S. Markle and Douglas Shackelford (2), Do 

Multinationals or Domestic Firms Face Higher Effective Tax Rates?, National Bureau of Economic 

Research, Working Paper 15091 (June 2009); Jennifer L. Blouin and Irem Tuna, Tax Contingencies: 

Cushioning the Blow to Earnings?, Working Paper (April 2007); Michelle Hanlon and Edward L. 

Maydew, “Book-Tax Conformity: Implications for Multinational Firms,” National Tax Journal, vol. 62, 

no. 1 (March 2009) 127-153; Scott D. Dyreng, Michelle Hanlon, and Edward L. Maydew, “Long-Run 

Corporate Tax Avoidance,” The Accounting Review, vol. 83, no. 1 (2008) 61-82. 
Appendix I: Summary of Selected Past 

Estimates of Average Effective Tax Rates 

Based on Financial Statement Data

Page 29 GAO-13-520 Corporate Income Tax

The two studies by Markle and Shackelford report their estimates separately for domestic and 

multinational firms. For each study we use data on the pretax book income of each subpopulation of 

firms to report a weighted average effective rate for the entire population. 
Appendix II: Copy of IRS Form 1120, Schedule 

M-3 (Tax Year 2010) 

Page 30 GAO-13-520 Corporate Income Tax

Appendix II: Copy of IRS Form 1120, 

Schedule M-3 (Tax Year 2010)
Appendix II: Copy of IRS Form 1120, Schedule 

M-3 (Tax Year 2010) 

Page 31 GAO-13-520 Corporate Income Tax
Appendix II: Copy of IRS Form 1120, Schedule 

M-3 (Tax Year 2010) 

Page 32 GAO-13-520 Corporate Income Tax
Appendix III: Detailed Data on Book-Tax 

Differences for Tax Year 2010 

Page 33 GAO-13-520 Corporate Income Tax

Table 1: Data for Largest Book-Tax Differences for Part II Income Items

Dollars in billions

Part II income items

Book amount 

temporarily 

higher than 

tax amount

Book amount 

permanently 

higher than tax 

amount

Book amount 

permanently 

lower than tax 

amount

Book amount 

temporarily 

lower than tax 

amount

Absolute 

value total 

difference

Net 

difference

Other income (loss) items with 

differences $-119.7 $-121.2 $35.4 $63.2 $339.5 $-142.3

Income statement disposition 

of assets other than inventory -67.9 -79.0 19.7 41.5 208.1 -85.8

Interest income -135.2 -34.8 1.6 15.2 186.8 -153.2

Cost of goods sold (revised) -80.5 -5.1 9.3 82.7 177.7 6.3

Gross foreign dividends not 

previously taxed -2.3 -65.0 65.6 10.1 143.0 8.4

Income (loss) from U.S. 

partnerships -59.9 -4.6 18.9 40.4 123.8 -5.2

Income (loss) from equity 

method U.S. corps -4.6 -83.5 7.0 2.9 98.0 -78.3

Net gain/loss reported on 

Form 4797, line 17 -38.2 -1.4 1.9 55.2 96.8 17.5

Section 78 gross-up 0.0 0.0 77.6 4.8 82.4 82.4

Gross capital gains Schedule 

D, excluding flow-through 

entities -1.7 -0.1 9.6 64.0 75.4 71.8

Source: GAO analysis of IRS data.

Table 2: Data for Largest Book-Tax Differences for Part III Expense Items

Part III expense items

Book amount 

temporarily 

lower than tax 

amount

Book amount 

permanently 

lower than tax 

amount

Book amount 

permanently 

higher than tax 

amount

Book amount 

temporarily 

higher than 

tax amount

Absolute 

value total 

difference

Net 

difference

Other expense/deduction items 

with differences $-117.1 $-30.9 $43.6 $86.0 $277.5 $-18.4

Interest expense -24.1 -4.4 24.6 141.5 194.6 137.6

Depreciation -145.1 -0.2 0.6 36.0 181.9 -108.8

Other amortization or 

impairment write-offs -35.7 -1.4 6.2 60.4 103.6 29.5

Bad debt expense -45.6 -3.5 0.6 27.3 77.1 -21.2

Amortization/impairment of 

goodwill -26.9 -0.9 24.0 11.0 62.8 7.2

Pension and profit-sharing -38.2 -1.7 0.4 14.1 54.4 -25.5

Stock option expense -10.9 -24.0 3.5 11.9 50.2 -19.5

Appendix III: Detailed Data on Book-Tax 

Differences for Tax Year 2010
Appendix III: Detailed Data on Book-Tax 

Differences for Tax Year 2010 

Page 34 GAO-13-520 Corporate Income Tax

Part III expense items

Book amount 

temporarily 

lower than tax 

amount

Book amount 

permanently 

lower than tax 

amount

Book amount 

permanently 

higher than tax 

amount

Book amount 

temporarily 

higher than 

tax amount

Absolute 

value total 

difference

Net 

difference

Foreign current income tax 

expense (other than withholding) -1.4 -1.5 31.2 0.5 34.5 28.8

Other equity-based 

compensation -5.4 -8.5 4.7 9.7 28.4 0.4

Source: GAO analysis of IRS data.
Appendix IV: Descriptions of Income and 

Expense Items with the Largest Book-Tax 

Differences 

Page 35 GAO-13-520 Corporate Income Tax

Income items Description

Income statement disposition 

of assets other than inventory

and pass-through entities

Differences in this category and the one below relating to Form 4797 arise from differences in book 

and tax reporting of gains or losses arising from the sale or other disposition of business assets. One 

such difference arises when accumulated tax depreciation for an asset is higher than accumulated 

book depreciation, which would make the gain upon sale higher for tax purposes than book 

purposes.

Interest income Certain qualified interest income, such as that from municipal bonds, is exempt for tax purposes but 

must be reported as income in financial statements. Also some items may be treated as interest 

income for tax purposes but as some other form of income for financial accounting purposes.

Cost of goods sold Cost of goods sold comprises numerous items, some of which have their own lines on the M-3, like 

depreciation and stock options expense, and other which do not. Among the differences reported on 

this line are those relating to differences in inventory accounting.

Gross foreign dividends not 

previously taxed

This line includes any difference between the amount of foreign dividends that corporations report on 

their tax returns and the amounts they report in their financial statements, unless those dividends 

have already been taxed by the United States. 

Income (loss) from U.S. 

partnerships

This line relates to differences between the book and tax treatment of any interest owned by the filer 

or a member of the U.S. consolidated tax group that is treated as an investment in a partnership for 

U.S. income tax purposes (other than an interest in a disregarded entity). 

Income (loss) from equity 

method U.S. corporations

This line relates to differences between the treatment of income and losses from equity investments 

under financial statement rules and tax accounting rules . 

Net gain/loss reported on Form 

4797, line 17

See description relating to income statement disposition of assets.

Section 78 gross-up Section 902 of the Internal Revenue Code (IRC) permits a U.S. corporation that owns at least 10 

percent of the voting stock of a foreign corporation to take an indirect credit for foreign income taxes 

associated with dividends that it receives from that foreign corporation. Section 78 of the IRC 

requires U.S. corporations electing to claim the foreign tax credit to gross up (i.e., increase) their 

dividend income by the amount of creditable foreign income taxes associated with the dividends they 

received.

Gross capital gains Schedule 

D, excluding pass-through 

entities

This line covers differences in the book and tax reporting of capital gains, other than those arising 

from partnerships and other pass-through entities.

Expense items

Interest expense One reason for differences on this line is that certain amounts that are treated as tax deductions for 

tax purposes are treated as some other form of expense for financial accounting purposes, or vice 

versa. 

Depreciation For tax purposes a firm depreciates its assets using the modified accelerated cost recovery system 

method, which allows the write-off of an asset at a much faster rate than straight-line depreciation, 

the most commonly used method for financial accounting purposes.

Other amortization or 

impairment write-offs

This category covers differences in book and tax amortization rules for items other than those relating 

to goodwill or acquisition, reorganization and start-up costs.

Bad debt expenses Under Generally Accepted Accounting Principles, firms are required to estimate the proportion of 

sales that will ultimately become uncollectible and expense this amount in the same period as the 

recognition of the sale in revenue. In contrast, for tax purposes firms must wait until a specific 

receivable is known to be uncollectible before it can be deducted.

Appendix IV: Descriptions of Income and 

Expense Items with the Largest Book-Tax 

Differences 
Appendix IV: Descriptions of Income and 

Expense Items with the Largest Book-Tax 

Differences 

Page 36 GAO-13-520 Corporate Income Tax

Income items Description

Amortization or impairment of 

goodwill

Prior to 2002, goodwill was amortized over a maximum of 40 years for book purposes; after 2001 

financial accounting changed to the impairment method, whereby goodwill is only written down if it is 

judged by management and auditors to be impaired. For tax purposes, goodwill was not deductible 

prior to 1994; since 1994 goodwill must be amortized over 15 years. These differences between book 

and tax treatments can be either temporary or permanent.

Pension and profit-sharing This line covers all expenses attributable to any pension plans, profit-sharing plans, or any other 

retirement plans.

Stock option expense A stock option expense generally is recorded in a financial statement as the estimated fair value of 

the option over the period of time that the stock option vests. The exercise of the stock option does 

not affect the corporation’s net book income. In contrast, the IRC recognizes two types of stock 

options—qualified and nonqualified stock options. Firms cannot take deductions for qualified stock 

options (unless the stock is held for less than 2 years), although recipients get special beneficial tax 

treatment. For nonqualified stock options, the firm granting the option can deduct the fair market 

value when the recipient has an unrestricted right to the property and the fair market value can be 

reasonably ascertained.

Foreign current income tax 

expense (other than 

withholding)

This line shows the difference between the amounts of foreign income taxes that corporations report 

as expenses in their financial statements and the amounts that they claim as deductions for tax 

purposes. U.S. corporations typically claim foreign tax credits, rather than deductions, for most of the 

foreign income taxes they pay. Consequently, the book tax expenses typically far exceed the tax 

deductions.

Other equity-based 

compensation

Examples of the types of compensation that taxpayers are required to report on this line are 

payments attributable to employee stock purchase plans, phantom stock options, phantom stock 

units, stock warrants, stock appreciation rights, and restricted stock, regardless of whether such 

payments are made to employees or non-employees, or as payment for property or compensation for 

services. 

Source: GAO summary based on IRS documents and accounting literature.
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 37 GAO-13-520 Corporate Income Tax

James R. White, (202) 512-9110 or whitej@gao.gov

In addition to the contact named above, James Wozny (Assistant 

Director), Elizabeth Fan, Robert MacKay, Donna Miller, Karen O’Conor, 

Max Sawicky, and Andrew J. Stephens made key contributions to this 

report.

Appendix V: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments

(450956)
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