Why is taxable income typically higher on a tax return than net income on a financial statement?

The correct choice highlights that taxable income often exceeds net income due to the treatment of expenses for tax purposes. Tax regulations dictate the types of expenses that can be deducted when calculating taxable income, and these rules can differ significantly from accounting principles used for financial statements, resulting in discrepancies.

In many cases, businesses might defer the recognition of certain expenses for tax purposes, meaning they cannot immediately deduct them from taxable income even if they are recognized in the financial statements. This allows taxable income to remain higher than net income as reported on financial statements. For instance, certain depreciation methods or specific deductions may be permitted under tax laws that do not align with Generally Accepted Accounting Principles (GAAP).

Federal tax regulations may also treat some expenditures differently, such as allowing immediate expensing of certain costs while requiring the capitalization and amortization of others for financial reporting. Consequently, businesses can report higher taxable income on their returns compared to net income on their financial statements. Understanding these variations enables clearer insight into a company's financial health from both accounting and taxation perspectives.