What is ‘Tax Accounting’
Tax accounting is a structure of accounting methods focused on taxes rather than the appearance of public financial statements. Tax accounting is governed by the Internal Revenue Code, which dictates the specific rules that companies and individuals must follow when preparing their tax returns.
BREAKING DOWN ‘Tax Accounting’
Tax accounting is the means of accounting for tax purposes. It applies to everyone — individuals, businesses, corporations and other entities. Even those who are exempt from paying taxes must participate in tax accounting. The purpose of tax accounting is to be able to track funds (funds in as well as funds going out) associated with individuals and entities.
Tax Accounting for an Individual
For an individual taxpayer, tax accounting focuses solely on items such as income, qualifying deductions, investment gains or losses, and other transactions that affect the individual’s tax burden. This limits the amount of information that is necessary for an individual to manage an annual tax return, and while a tax accountant can be used by an individual, it is not a legal requirement.
Meanwhile, general accounting would involve the tracking of all funds coming in and out of the persons’ possession regardless of the purpose, including personal expenses that have no tax implications.
Tax Accounting for a Business
From a business perspective, more information must be analyzed as part of the tax accounting process. While the company’s earnings, or incoming funds, must be tracked just as they are for the individual, there is an additional level of complexity regarding any outgoing funds directed towards certain business obligations. This can include funds directed towards specific business expenses as well as funds directed towards shareholders.
While it is also not required that a business use a tax accountant to perform these duties, it is fairly common in larger organizations due to the complexity of the records involved.