Tax Accounting
Tax accounting refers to accounting of income for taxation purposes. The procedure provides necessary financial data to determine the payable tax.
Procedure
The system accounts for the taxpayer's income, expenses, assets and liabilities for the purpose of determining gross income and taxable income, which are the bases for computing income tax due. The procedure yields figures and other data necessary in tax return preparation. The resulting tabulations though are different from income records of the taxpayer are only useful in tax issues. Hence, in the case of taxpayer-corporations, a different computation of financial accounting is presented to stockholders during dividend distribution.
The taxpayer may personally undertake tax accounting but in cases of corporations and when considerable amounts of income are involved, they may hire tax accountants, professionals trained in assisting taxpayers to prepare returns.
Technology
Recent developments in technology have made tax accounting easier with the aid of an accounting software. It is an application software that creates an organized database for recording, processing and accounting the taxpayer's in-going, out-going and internal transactions. With this software, the taxpayer or an accountant need not painstakingly make mathematically complex tabulations to arrive at taxable income.
Governing Law
Unlike most countries, tax accounting in the United States, is not governed by generally accepted principles of accounting. It is rather governed by the Internal Revenue Code, the federal statute which regulates all aspects of taxation. The said Code provides for rules to be followed in accounting including accounting methods, tax periods and their limitations.
Tax Accounting Methods
A method of tax accounting must be consistently used by a taxpayer for a tax period, which shall be used to compute income tax. Any method determines when income is earned for purposes of its inclusion in the current income tax return.
The most common permissible methods of tax accounting are the cash basis and the accrual basis. The cash basis method follows the doctrine of actual receipt, which includes income when it is actually received and declares deductions when they are actually expended. Accrual basis, on the other hand, follows the doctrine of constructive receipt, which includes income earned though not actually received and declares deductions when expenses are still owed though not actually paid.
If the taxpayer engages in more than one business then it may use a different method for each business. The consent of the IRS is necessary to use a combination cash and accrual basis and in cases of change of accounting method.
Taxable Accounting Year
Taxable income shall be computed on the basis of the taxpayer's taxable year, which determines the period of filing and coverage of returns. For taxable income transactions that extend for a year or so, there are two kinds of taxable years from among which the taxpayer may elect: the calendar year and the fiscal year. The calendar year means a period of 12 months ending on December 31 while the fiscal year means a period of 12 months ending on the last day of any month other than December. If the taxable period is shorter than 12 months, the tax year is deemed to be the period for which the return is made. A change in the accounting year requires the consent of the IRS.