Why might effective and marginal tax rates differ for a corporation?

The difference between effective and marginal tax rates for a corporation primarily arises from how income is recognized in financial statements versus tax filings. The effective tax rate is calculated by taking the total tax expense divided by the total income, reflecting the average rate at which a company is taxed on its overall income. In contrast, the marginal tax rate applies to the last dollar of income earned, which could be affected by specific tax deductions, credits, and the differing treatment of certain revenues and expenses for accounting and tax purposes.

In many cases, a corporation might report income in a way that complies with financial accounting standards, but the tax code allows for different treatment, leading to discrepancies. For example, companies may utilize accelerated depreciation, inventory accounting methods, or specific deductions that lower their taxable income in ways not reflected in their financial statements. This results in an effective tax rate that differs from the marginal rate, which is focused on the tax impact of additional income earned.

The other options don't directly address the relationship between effective and marginal tax rates in the context of tax treatment and accounting practices.