Treasury task force, which overhauled the regulations, attempted and succeeded in narrowing the gap between consolidated income tax reporting and consolidated reporting for financial statement purposes. The purpose of this article is to discuss some of the major changes and point out how these new regulations narrow the taxable and accounting income gap for consolidations. The "one entity" concept was not accepted "in toto" by the drafters of the new rules. Accordingly, the new regulations do not accept the historical Congressional interpretation that separate, legal corporations, should not obscure the fact that an affiliated group is a single corporation owned by the same individuals and operated as one unit. A series of computations and sub-computations are necessary whenever one undertakes the preparation of the consolidated return and the computation of the consolidated tax liability. A logical starting point is to determine, in accordance with the consolidated return rules, the separate taxable incomes of each member of the affiliated group. The first step is to compute separately for each member of the group all items of income or deductions in substantially the same manner as if separate returns were filed

The article focuses on the effects of alternative depreciation policies on reported profits. It also reports on the depreciation of a newly acquired asset by an accelerated method results in relatively low taxes early in the asset's life and higher taxes later on as the depreciation tax allowance declines. If operating revenues and all expenses other than depreciation are constant, and if the profits reported to stockholders are computed by using straight line depreciation, then after-tax earnings follow a reverse pattern. Depending on the rate and duration of asset growth, on debt policy, and in the case of regulated utilities, on how the benefits of the tax savings are distributed among ratepayers and stockholders, the different accounting treatments produce widely varied patterns of reported profits. The complicated interrelationships among these variables make it virtually impossible to study the problem algebraically, and the volume of calculations prevents one from working out the relationships manually. However, the problem is ideally suited for simulation analysis, and this is the principal analytic tool used in the study

The federal income tax laws and regulations allow a certain latitude for businessmen to either capitalize or expense certain expenditures. One major area where such a latitude exists is repairs. When a company makes an expenditure for repairs which could be either capitalized or expensed without forseeable objection from the Internal Revenue Service, then a capitalize-expense decision must be made by management which will optimize profits. When an expenditure has been made which falls within a discretionary area for income taxes (e.g., it may be expensed or capitalized) a decision which maximizes the tax savings over time is desired. In general, the analysis will be the same as that used to determine the optimal depreciation policy for capitalized expenditures. In most practical situations salvage value on a particular asset is of no great concern. The revenue code allows the tax payer to reduce the amount of salvage by 10% of the cost of the depreciable property. Since most items of expenditure do not involve salvage values in excess of 10% of cost, salvage value presents no problem