Tax accounting is a way of keeping track of finances specifically for preparing tax returns for people, businesses, and other organizations. It’s regulated by the Internal Revenue Code and monitors both income and expenses. Unlike financial accounting, it zeroes in on transactions that have an impact on taxes.
Tax Accounting for Individuals
For a single taxpayer, It is all about things like income, eligible deductions, investment profits or losses, and any other transactions that impact their tax responsibilities.
This keeps the information needed for filing an annual tax return pretty straightforward, and while individuals can hire a tax accountant, it’s not mandatory.
On the other hand, general accounting covers all the money flowing in and out of a person’s hands, no matter the reason, including personal expenses that don’t affect taxes.
Tax Accounting for Businesses
From a business standpoint, it’s essential to dive deeper into the data during the tax accounting process. Just like individuals, companies need to keep tabs on their earnings and incoming cash flow. However, businesses face an extra layer of complexity when it comes to outgoing funds, especially those tied to specific obligations. This includes money spent on various business expenses and payments made to shareholders.
Although hiring a tax accountant isn’t mandatory for businesses, many larger companies opt for one because of the intricate nature of their financial records.
Conclusion
Tax accounting involves various techniques that help businesses keep track of their tax obligations and steer clear of penalties. It’s essential for both companies and individuals to accurately report their income, pay the right amount of taxes, and dodge any potential penalties or audits from the IRS.