The Influence of Tax and Non-Tax Costs On Book-Tax Reporting Differences: Public and Private Firms

Abstract

We provide archival evidence of the effect of tax and non-tax costs on book-tax reporting using tax return data on public and private manufacturing firms. Prior research suggests that managers should conform their book-tax income to minimize tax-related costs. However, book-tax reporting conformity can also impose non-tax costs. We find evidence that public firms have generally higher non-tax financial reporting costs that result in larger book-tax reporting differences. In addition, we find that debt imposes higher non-tax costs on firms that are privately-held or more financially distressed, and that non-tax costs associated with bonus plan thresholds and book income patterns affect public-managers' book-tax reporting. Our results extend prior studies that focus on conforming transactions. From a tax policy perspective, our results suggest that book-tax differences may be a less useful indicator of private firms' aggressive tax positions because they have fewer incentives to report non-conforming book income.