Under what circumstance can a company use tax rules on their financial statements?

A company can use tax rules on their financial statements specifically when the difference between GAAP (Generally Accepted Accounting Principles) and IRS (Internal Revenue Service) rules is not material. This means that if the discrepancy between the two sets of rules does not significantly impact users' understanding or the economic reality of the company's financial position and performance, it is permissible to apply tax rules instead of GAAP for reporting purposes.

This approach is often utilized to simplify reporting and reduce the burden of complying with more complex GAAP requirements, especially for smaller or less significant transactions. The rationale is that if the difference is not material, stakeholders—such as management, investors, and creditors—may make decisions based on the tax basis figures without any significant risk of misleading information.

In contexts where the difference is material or when preparing audited financial statements, the company is typically required to comply with GAAP to ensure accuracy and consistency in financial reporting.