Below is a discussion of some common reserves that may be claimed in calculating taxable income.

Holdbacks and Long-Term Receivables

If a company has a holdback on a receivable, this holdback is reported as income on their financial statements but a reserve may be deducted from taxable income for this amount less the related payables and then added back in the year it is received. In the same way, if a company enters a sales agreement in which it does not expect payment for at least two years, a reserve may be deducted from taxable income for this amount and then added back in the year the payment is received.

Counsel or Financing Fees

Only the portion of counsel or financing fees that relates to the tax year would be deducted from taxable income. For example, if a company paid $10,000 upfront as a financing fee to negotiate a five-year mortgage, $10,000 may be expensed on the financial statements but for tax purposes, only 1/5 of this should be included in the calculation of taxable income. A reserve of $8,000 is added back to taxable income and deducted over the next four years.

Goods or Services Delivered Post Year-End

For financial statement purposes, a company’s revenue recognition policy may be to recognize revenue at the time of sale. For tax purposes, however, a reserve may be claimed to deduct from taxable income those sales for which goods or services are delivered after the year-end date often referred to as Deferred Revenue. The reserve would then be added back in the subsequent year.