Interactions Between Financial and Tax Accounting Caused by the Tax Reform Act of 1986

The Tax Reform Act of 1986 extensively revised corporate minimum tax provisions and greatly restricted tax avoidance opportunities. One important provision is the "book adjustment," which requires that a portion of the difference between a book net income amount and a tax income amount be an upward adjustment in the alternative minimum tax (AMT) base. These provisions create a new relationship between financial reporting and tax compliance that may directly affect both tax and financial accounting systems. Criticisms of the AMT limiting provisions include: 1. It causes another policy consideration to enter into the decision framework. 2. It may undermine generally accepted accounting principles (GAAP) by implicitly encouraging the use of non-GAAP procedures. 3. The minimum tax preference items and adjustments provide a new source of confusion. Congress should maintain the tax accounting and financial accounting systems as separate and distinct functions.