What Is Tax Accounting?

Definition of Tax Accounting

Tax accounting is a set of accounting systems that focuses on taxes rather than the appearance of financial statements in the public domain. The Internal Revenue Code governs tax accounting, laying out the particular procedures that businesses and individuals must follow when filing their tax returns.

TAKEAWAYS IMPORTANT

• Tax accounting is a branch of accounting concerned with the preparation of tax returns and payments.
• Individuals, enterprises, corporations, and other entities employ tax accounting.
• Individual tax accounting focuses on income, eligible deductions, charitable contributions, and any investment profits or losses.
• Tax accounting is more complicated for a firm, requiring additional examination of how funds are spent and what is or isn't taxable.

Learn more about Tax Accounting

Accounting for tax purposes is known as tax accounting. Individuals, enterprises, corporations, and other entities are all involved. Even people who are not required to pay taxes are required to engage in tax accounting. The goal of tax accounting is to be able to track funds linked with individuals and corporations (both inbound and outbound).

Difference between Tax Accounting Principles & Financial Accounting

When it comes to accounting in the United States, there are two sets of principles that are applied. Tax accounting principles are the first, and financial accounting, or generally recognized accounting standards, is the second (GAAP).

When compiling financial accounts and accounting for any and all financial transactions, corporations must adhere to a standardized set of accounting principles, regulations, and processes known as GAAP. 1 When compiling financial statements and tax payables, balance sheet items can be accounted for in a variety of ways. For example, corporations can use the first-in-first-out (FIFO) technique to record inventories for financial purposes while using the last-in-first-out (LIFO) method for tax purposes to prepare their financial statements. The latter approach lowers the amount of taxes owed for the current year.

While accounting covers all financial transactions to some extent, tax accounting focuses only on transactions that affect an entity's tax burden, as well as how those transactions relate to correct tax calculation and tax document production. The Internal Revenue Service (IRS) regulates tax accounting to guarantee that all relevant tax regulations are followed by tax accounting professionals and individual taxpayers.2 To correctly submit tax information as required by law, the IRS also mandates the use of specified paperwork and forms.

Different types of Tax Accounting.

Tax Accounting for a Business

More information must be reviewed as part of the tax accounting process from a business standpoint. While the company's revenues, or entering cash, must be tracked in the same way that an individual's must, any exiting monies directed toward particular corporate commitments adds a layer of complexity. This can comprise both funds earmarked for specific business needs and funds earmarked for shareholders.

While it is not mandatory for a company to hire a tax accountant to handle these tasks, it is very frequent in larger companies due to the complexity of the data.

Tax Accounting for an Individual

Individual taxpayers' tax accounting is only concerned with items like income, eligible deductions, investment gains or losses, and other activities that affect their tax burden. This reduces the amount of information required for an individual to manage a yearly tax return, and while hiring a tax accountant is an option, it is not required by law.

Meanwhile, general accounting would entail keeping track of all funds entering and exiting a person's possession, regardless of their intended use, including personal expenses that are not tax deductible.

Tax Accounting for a Tax-Exempt Organization

Even if an organization is tax-exempt, tax accounting is still required. This is owing to the fact that most businesses are required to file annual reports. 3 They must disclose any incoming finances, such as grants or gifts, as well as how the funds are spent during the operation of the organization. This ensures that the organization follows all applicable laws and regulations governing the appropriate running of a tax-exempt organization.