Every business or entity must abide by the accounting conceptual framework provided by FASB, an accounting body that outlines key objectives of financial reporting. In a nutshell, accounting theory is more qualitative than it is quantitative in the manner it guides financial reporting. Tax accounting is a method of accounting focused on taxes rather than financial statements governed by internal revenue codes that state the specific rules for individuals and companies to follow when preparing tax returns for a financial year. Tax accounting is a sector of accounting that deals with tax preparation and tax payment. Individuals, corporations, businesses, and other entities use tax accounting to prepare their tax returns. Tax accountants sydney focus mostly on incomes, donations, and investment gains that qualify for tax deductions.
What is tax accounting?
It is simply a means of accounting focused on taxation applicable to everyone including businesses, individuals, corporations, and tax-exempt entities. Tax accounting tracks incoming funds and outgoing funds for taxation. What are the major differences between tax accounting and financial accounting? While there are two sets of accounting standards for a typical accounting system, financial accounting captures every transaction, and tax accounting captures transactions that affect an entity’s tax burden.
Tax accounting types
There are three major types of tax accounting one is likely to come across in the corporate world. They are classified according to the subject i.e tax accounting for individuals, tax accounting for businesses, and finally, tax accounting for tax-exempt organizations.
Tax accounting for individuals normally focuses on items that qualify for deductions for an individual such as income tax deductions, return on investments, and other items that affect the tax burden for an individual. This limits the amount of information required of an individual to present as annual tax returns and a public accountant may be used or not to compute taxations. There is no legal requirement for the use of a public accountant to compute taxes for an individual.
For a business, tax information is voluminous and requires expertise to comprehend and represent tax reporting following laid down guidelines acceptable in accounting principles. There is more information to be analyzed compared to individual tax computation. But there is no legal requirement for an accountant to undertake tax compilation in a business, it is much more reasonable for larger organizations and businesses to employ the services of an accountant following the amount of information and complexity therein.
Even if an organization is tax-exempt, it should prepare tax accounting as necessary because it must present its tax returns at the end of the year. They must present information regarding funds, grants, and donations and how the funds were used for organizations’ operations. Tax accounting for any tax-exempt organization is helpful for organizations to adhere to laws and regulations requiring these organisations to provide their tax information annually to oversight agencies and other regulators. It is useful for tax-exempt organizations to undertake financial reporting because auditors will leverage this information to deliver their audit reports. It is also in the interest of the organization to provide financial reports for stakeholders to review how their money was used in the cause.