Accounting and taxation may have some overlap, but are distinct disciplines. Accounting involves analyzing an organization’s finances as a whole while taxation refers to specific procedures that businesses must follow when filing tax returns.
Tax accounting encompasses methods used to compile financial statements for taxes, such as the cash method or accrual method, or inventory techniques like first-in/first-out (FIFO) and last-in/first-out (LIFO). Therefore, having specialists in both fields is paramount.
Accounting for Taxes
Accounting from a business’s point of view requires extra data analysis as part of its tax accounting process. Although earnings and cash influx must be recorded similarly to individuals, funds dedicated toward specific corporate commitments such as funding for specific needs or donations to shareholders add an extra level of complexity that must be managed.
In the United States, the Internal Revenue Code governs accounting methods that companies and individuals must follow for filing tax returns. This includes special adjustments to book profit in order to calculate taxable income and taxes due.
Income tax accounting also enables companies to manage future year liabilities or deferred taxes by calculating them early and managing cash taxes accordingly. By staying current on tax policies as they evolve, income tax accountants help individuals, businesses and corporations keep abreast of changing obligations which ensure compliance and reduce fines for missed deadlines.
Individual Tax Accounting
Individual tax accounting involves keeping track of funds related to individuals. It differs from financial accounting in that its primary focus is calculating taxable income based on the Internal Revenue Guide. Individual taxpayers must use accounting methods that comply with local, state, and national laws while even exempt entities must use this process in order to trace funds associated with people and businesses.
Tax accountants provide these services for people, organisations and corporations – such as governments – at all levels, from individuals through organizations and corporations to governments. While general accountants manage all concerns for an organisation at once, tax accountants must adhere to federal, state and local rules regarding taxes. Individual tax accounting can reduce information requirements when filing your annual return compared with general accounting by only taking into consideration items like income, eligible deductions and investment gains/losses that help facilitate filing more quickly.
Corporate Tax Accounting
Tax accounting involves keeping track of profits and losses of a corporation as well as managing payments of corporate taxes. A certified public accountant (CPA) can assist with your business’s tax accounting while helping ensure compliance with financial regulations to avoid penalties and fines.
Taxable corporate profits are calculated as revenue minus allowable deductions such as cost of goods sold, wages and employee compensation, interest, most other expenses, depreciation and advertising expenses. They may differ from pretax income figures due to differences in accounting principles used for financial statements vs those used for tax filing purposes.
At the end of each 12-month financial year, companies liable to corporation tax must submit a Company Tax Return to HMRC. An accountant can help reduce this liability by suggesting various methods to limit taxable income while remaining compliant with regulations.
Nonprofit Tax Accounting
Nonprofits may be tax-exempt organizations, but that doesn’t exempt them from adhering to stringent financial standards. Many nonprofits hire professional bookkeeping and accounting firms in order to comply with both state and federal regulations.
Nonprofit regulations differ significantly from for-profit ones. Nonprofits shouldn’t use personal bank accounts when receiving and disbursing funds; rather, they should ask their banks for tailored chequing accounts so they can track transactions using bookkeeping systems while matching up actual bank balances with transactions recorded in bookkeeping systems.
Nonprofits must also abide by the rules regarding restricted funds, which can only be spent for certain projects and activities until a set date. Such restricted funds could either be temporary or permanent like endowments. Furthermore, nonprofits must keep tabs on their net assets so as to be transparent about the money earned and spent.