To ensure timely filing of corporate tax returns, PBC (Prepared by Client) items are due to the company’s Tax team by mid-Janurary of each year. The company’s Finance & Accounting team (Controller) typically leads this process.
Typical PBC items include:
Tax returns are signed by the company’s officers (CTO, or hired CEO when in place) under penalties of perjury. OCV companies will have a controller review the return prepared by tax accountants who may ask clarifying questions or suggest for the company’s officers to provide information about how the tax return compares to internally produced financial statements or other information.
Most early stage businesses won’t have too much going on tax wise and startups will often have taxable losses rather than income which can be carried forward to offset income in future years.
Taxable vs Book Income
Accrual basis accounting as required by GAAP for CPAs in preparing company financial statements records sales and expenses at the time they occur rather than when those sales or expenses are realized in a cash basis. It is important that financial statements recognize when sales occur or expenses are incurred in order to give investors the best picture of actual sales performance and associated expenses.
The cash basis of accounting instead takes into account the actual amount of actual cash represented as revenue and expenses. The actual return payable to the IRS is based on the taxable income/loss as determined by the cash basis of accounting which will have differences compared to the financial statements of a company.
Some differences between financial and taxable accounting are temporary differences which will eventually reverse themselves or be eliminated such as those where there are timing differences resulting from accrual compared to cash. Other differences are permanent differences which will never reverse or be eliminated over time.
Financial statements for a startup for example will account for the interest in convertible notes (where applicable) as an interest expense on an accrual basis because it is considered debt, but because that interest is only serving to reduce the purchase price of shares in a priced round for the note holder, the interest expense will not ever actually be borne out in cash representing a permanent difference.
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