What Is Tax Accounting?

Tax accounting is a method of accounting used to prepare tax returns for individuals, corporations, and other entities. Governed by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Code, it tracks funds coming in as well as funds going out. Unlike financial accounting, it only focuses on transactions that affect taxes.

Tax Accounting Principles vs.ꦫ Financia🌜l Accounting (GAAP)

In the United States, there are two sets of accounting principles: tax accounting principles and financial accounting principles, or 澳洲幸运5官方🅺开奖结果体彩网:generally accepted accoun🦩ting principles (GAAP).

Under GAAP, companies must follow a common set of accounting principles, standards, and procedures when they compile their financial statements by accounting for any and all financial transactions. 澳洲幸运5官方开奖结果体彩网:Balance sheet items can be accounted for differently when preparing 澳洲幸运5官方开奖结果体彩网:financial statements and tax payables. For example, companies can prepare their financial statements implementing the first-in-first-out (FIFO) method to record their inventory for financial purposes, yet they can implement the last-in-first-out (LIFO) approach for tax purposes. The latter procedure reduces the current year's taxes payable.

While accounting encompasses all financial transactions to some degree, tax accounting focuses solely on those transactions that affect an entity's tax burden, and how those items relate to proper tax calculation and tax document preparation. Tax accounting is regulated by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) to ensure that all associated tax laws are adhered to by tax accounting professionals and individual taxpayers. The IRS also💎 requires the use of specific documents and forms to properly submit tax informatio🌺n as required by law.

Tax Accounting for Individuals

For an individual taxpayer, tax accounting focuses solely on items such as income, qualifying deductions, investment gains or losses, and other transactions that affect the individual’s tax burden. This limits the amount of information that is necessary for an individual to manage an annual tax return, and while a tax 澳洲幸运5官方开奖结果体彩网:accountant can be used by an individual, it is not a legal requir𝓀ement.

Meanwhile, general accounting would involve the tracking of all funds coming in and out of the persons' possession regardless of the purpose, including personal expenses that have no tax implications.

Tax Accounting for Businesses

From a business perspective, more information must be analyzed as part of the tax accounting process. While the company’s earnings, or incoming funds, must be tracked just as they are for the individual, there is an additional level of complexity regarding any outgoing funds directed towards certain business obligations. This can include funds directed towards specific 澳洲幸运5官方开奖结果体彩网:business expenses as well as funds directed towards 澳洲幸运5官方开奖结果体彩网:shareholders.

While it is also not required that a business use a tax accountant to perform these duties, it is fairly c𓄧ommon in larger organizations due to the complexity of the records involved.

Tax Accounting for Tax-Exempt Organizations

Even in instances where an organization is tax-exempt, tax accounting is necessary. This is due to the fact that most organizations must file 澳洲幸运5官方开奖结果体彩网:annual returns. They must provide information regarding any incoming funds, such as grants or donations, as well as how the funds are used during the organization’s operation. This♔ helps ensure that the organization adheres to all laws and regulations governing the proper operation of a tax-exempt entity.

The Bottom Line

Tax accounting is a set of methods for accounting and a useful tool that companies use to understand their tax liability and avoid penalties. ♌Tax accounting is key not only for businesses but also for individuals to declare the correct income, pay appropriate taxes, and avoid penalties or IRS audits.