Tax accounting

What is Tax accounting?

Tax accounting refers to the rules that are used to generate tax assets and liabilities in a company's or individual's accounting records.

Tax accounting is a set of accounting methods that is primarily concerned with taxes rather than the appearance of public financial statements. It is governed by the Internal Revenue Code, which specifies the specific rules that businesses and individuals must follow when preparing their tax returns.

Individual Income Tax Accounting

For individual taxpayer focus is solely on income, qualifying deductions, investment gains or losses, and other transactions that affect the individual’s tax burden. This reduces the amount of information required for an individual to manage an annual tax return, and while an individual can use a tax accountant, it is not a legal requirement.

Meanwhile, general accounting would entail keeping track of all funds coming into and out of a person’s possession, regardless of their intended use, including personal expenses with no tax implications.

Accounting for Taxes in a Business

More information must be analysed as part of the tax accounting process from a business standpoint. While the company’s earnings, or incoming funds, must be tracked in the same way that they do for individuals, any outgoing funds directed towards specific business obligations add an extra layer of complexity. This includes funds allocated to specific business expenses as well as funds allocated to shareholders.

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

Tax Accounting for a Nonprofit Organization

Tax accounting is required even when an organisation is tax-exempt. This is because most organisations are required to file annual returns.

They must provide information on any incoming funds, such as grants or donations, as well as how the funds are used during the operation of the organisation. This assists in ensuring that the organisation complies with all laws and regulations governing the proper operation of a tax-exempt entity.