I wanted to wait until I had time to write it all out.
Most corporations (all publicly traded companies) calculate book income on a accrual method of accounting. This means that they estimate and record transactions that may not have been settled in cash within that year. For instance, if a company sells a million dollars in product on the last day of the year on thirty day terms, the sale is included in income, even though cash has not been received. Conversely, a company may spend 100 million on capital assets, but they record the deductions over the estimated useful life of the assets.
Now, when preparing a tax return, I have to look at all the balance sheet accounts and understand how the accounts are calculated. Next, I have to look at the tax rules for each of those accounts and determine the proper tax treatment. What this leads to is what we call timing items (book and tax both recognize the items, but in different years). Examples of items that are favorable for taxpayers include:
Depreciation on fixed assets:
as I said, for book, you estimate the useful life and depreciate it straight line. For instance, I may spend a million dollars on an asset and say it has a useful life of 10 years. Thus, I would record depreciation expense of 100,000 a year for 10 years. For tax, all assets fit into a predetermined asset class. If my million dollar investment was a piece of equipment, it would have a tax life of 7 years and be depreciated using what is called the double declining method (an accelerated method of accounting - 14.29% in year one, about 28% in year two, etc.). As you can see, you record more depreciation deductions in the early years for tax and more book in later years. What this means is a company would record current tax expense of a lesser amount (due to the accelerated tax deduction over book) and record deferred tax expense of the remainder (telling the financial statement holder I will owe taxes in a later year). What this means is I record total tax expense equal to the statutory tax rate, but get to pay a lesser amount in the early years.
Additionally, back in 2001, Congress passed a short term law allowing companies to immediately expense 30% of the cost of tangible personal property (items with a tax life of 15 years or less - ie no buildings) and depreciate the remaining 70%, pro rata, over the tax life and percentages. This was a smart idea at the time, as I saw many clients invest hundreds of millions that they would have otherwise delayed, helping to jump start the economy. Problem is that congress has extended it many times and increased the percentage of bonus depreciation (Obama even had one year with 100% bonus depreciation! allowing companies to immediately expense the entire cost for tax).
Intangibles:
For tax, all intangibles are amortized straight line over a 15 year life. For book, trademarks and goodwill are not amortized (they are tested annually for impairments, meaning most companies never expense them for book). What this means is that after fifteen years, they will have expensed entirely for tax, but not all for book (resulting in a significant deferred tax liability, telling the readers of the financials that a significant tax liability is due in the future).
Examples of items that are not favorable to the taxpayer include:
Environmental liabilities: companies have to accrue expenses they expect to incur in restoring land to its original condition. This means companies are recording expenses every year. For tax, you are not entitled to a deduction until a cash payment is made. In this instance, companies will pay tax on more income, as they are not entitled to a current deduction (they would record a deferred tax asset, allowing the readers to see the company has a future tax deduction).
Pension liabilities: companies will accrue pension expenses every year for book, but only get a tax deduction when a contribution is made to the pension plan. Again, a deferred tax asset is recorded and does not reverse until cash payments are made in the future.
Now, in addition to timing items, there are permanent differences. These are items that are different for book and tax and never reverse. Taxpayer unfavorable perms include meals and entertainment (50% is never deductible for tax), political contributions (never deductible for tax), lobbying costs (never deductible for tax), executive compensation (non performance based pay over a million dollars is never deductible), and personal usage of aircraft by executives (complex calculation of what portion is nondeductible for tax). MATERIAL favorable perms include:
Domestic manufacturing deduction:
In order to encourage companies to manufacture product in the US, companies get to shave 9% off their tax liability for activities that qualify (instead of paying 35% in tax, they pay 31.65%).
Credits:
These are usually things congress wants to encourage companies to invest in. Examples include, low income housing credit, research and development credits, jobs tax credits, green energy credits, etc.
Charitable contribution of product:
Certain items (food, school equipment, etc) get an enhanced deduction to encourage companies to donate these supplies instead of simply disposing them or selling Them at cost.
Finally, there is the issue of how to tax income earned overseas (and taxed in that foreign jurisdiction). Generally speaking (it is MUCH more complex) a company will owe taxes on the difference between the US tax rate (usually 35%) and what they paid in the foreign jurisdiction. The catch is that the tax is not owed until the money is repatriated to the US. thus, companies usually invest the profits in the foreign jurisdiction "indefinitely". The money can never be paid out to owners until it is repatriated, so it is trapped in that foreign jurisdiction. This IS an area of abuse. For instance, apple holds all of its intellectual property in a foreign jurisdiction and charges out royalties to shift income to this country. Most agree this is bull shit and needs to be addressed. Conversely, the company I work for has about ten percent of our income overseas and don't do anything like that. If I have a legitimate business in the UK and pay their taxes, should I owe US taxes on that just because my headquarters is in the US? Most other countries say no, which is why you see companies moving their headquarters (they still pay taxes on income earned in the US, but don't have to pay on worldwide profits).
Now, having said all of that, many of these articles make a dishonest comparison and look at CURRENT Taxes paid and compare it as a percentage of book income. A few years ago, Yum Foods got blasted for paying no taxes while making good money for book. After looking at the financial statements, it turns out they made a HUGE pension contribution that year, triggering a tax deduction (book deductions had been added back for decades). Frankly, this was VERY FAVORABLE, to the government, as these deductions had been deferred for years. The article was complete bullshit and preyed on people's ignorance.
After all that, there are areas that we should discuss:
Why do we keep extending bonus depreciation? We no longer need it to stimulate the economy. While this is a timing item, allowing it to expire would stop extreme accelerations of tax deductions
What credits do we need to keep? Honestly, this is a social question in many instances. Companies would not invest in low income housing but for the credit. Does the government want to own billions and billions in property across the US it would have to manage? Does the government want to encourage companies to invest in green energy, knowing it is a losing cause in most instances today?
What credits do we get rid of? There are obvious pork credits that exist due to powerful congress members over time (oil and gas, timber, ex.).
Finally, how do we handle taxation of global profits? In a global economy, it is relatively easy, over the long term, for companies to move their head quarters overseas and avoid this (as the US is one of few that do this). To answer your question, most countries recognize this is a losing battle and instead levy the tax on the individuals (it is usually more difficult for the individual to give up their citizenship and move to avoid the tax). No matter what you do, abuses like those at Apple need to be addressed.
Hopefully, this provided some insight (took me and hour on my iPad). Please let me know any questions you have. I actually love what I do and enjoy giving people some insight into a very complex topic (despite articles and politicians trying to make it seem so simple).
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