All About Tax Accounting

KEY TAKEAWAYS

• There are a number of different types of tax-exempt organizations.
• Each type of organization has its own set of regulations and rules for tax accounting.
• Tax-exempt organizations must file specific forms every year.
• These forms cover a variety of information that’s specifically about the organization, including its income and expenses.
• Tax accounting services help businesses and individuals with their tax accounting needs.
• You can hire external help from a tax accounting expert or an accounting firm.

What is Tax Accounting?

Tax accounting is an accounting practice. It involves the process of recording, classifying, and reporting a company’s income and expenses for tax purposes. The goal is to ensure that a company is compliant and accounts for its tax burdens. This means their financial statements are fully in compliance with any tax rule or regulation.

This type of accounting is used to calculate a company’s taxable income (income that is subject to tax). A company’s taxable income can be different from its financial statement income.

Tax Accounting Principles vs Financial Accounting (GAAP)

Tax accounting principles are different from financial accounting principles (GAAP). GAAP is the standard set of accounting rules. Companies use it to prepare their financial statements. Financial statements show a company’s financial position, performance, and cash flow.

Tax accounting principles are designed specifically for tax purposes. They are used to calculate a company’s taxable income. Tax accountants must follow these principles when preparing a company’s tax return. Different organizations and industries may use different principles.

Tax Accounting for an Individual

Individuals must file a basic tax return every year. A tax return shows a person’s taxable income and tax liabilities. Tax accountants use tax accounting principles to calculate a person’s taxable income.

Tax accounting for an individual can be fairly simple. Most individuals need to file a 1099, or have their taxes taken out through the company they work for. There are a few common tax accounting methods used by individuals:

Tax Accounting for a Business

Businesses must also file a tax return every year. The tax accounting method for a business can be more complicated when compared with individual tax accounting. Businesses have a number of different types of income and expenses that need to be taken into account.

There are also many different business structures that need to be considered. Some of the most common structures are:

• Sole proprietorship
• Partnership
• Limited liability company (LLC)
• S-Corporation
• C-Corporation

Each type of business structure has different tax accounting requirements. Businesses must also file state, local, and federal taxes.

Tax Accounting for a Tax-Exempt Entities

Tax-exempt organizations must also file a tax return every year, though with different forms and processes. There are a number of different types of tax-exempt organizations. Each with its own set of rules and regulations.

These organizations must file specific forms every year, which cover a variety of information about the organization including its income and expenses.

Summary

As a business owner, understanding tax accounting is essential. You don’t have to be a professional accountant with an accounting degree and certifications. However, it can be useful to get external help from someone with an accounting degree. Having the right accounting frameworks for income taxes ensures that you compliant with the law and minimizes your tax liability.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.