US Tax Accounting

August 24, 2017
US Tax Accounting

Tax Accounting is a service on the compilation, organization, and summarization of all relevant business transactions of an organization in compliance with the regulations set by the taxing authority of a country. The purpose of which is to satisfy a recurring (annually, biannual, etc.) obligation to the state.

It is one of the largest industries in the accounting sector partially because of its necessity. Tax preparation services account for a significant chunk of the revenue of the four largest accounting firms in the US, namely Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG.

Who Governs Taxation In The US?

The United States Federal Government collects on the average 3 to 4 trillion dollars in taxes every year. For the upcoming year 2018, they are expecting to receive another $3.654 trillion dollars across various revenue sources. (1)

Collecting and monitoring such a massive revenue requires the government to create a separate agency to govern tax collection. This is where the IRS comes in.

Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

-IRS Mission Statement

IRS, which stands for Internal Revenue Service, was founded on July 1, 1862 as the revenue collection bureau of the Department of Treasury. They are also in charge of administering the Internal Revenue Code of the US. With its central office located in Washington, DC, the bureau currently employs a least 79,000 individuals. (2)

What Is The Internal Revenue Code?

Formally known as the Internal Revenue Code of 1986, the IRC is “bible” of taxation in the US. The code guides the Internal Revenue Service in conducting their responsibilities. It also contains the guidelines that must be followed by all taxpayers. The US House of Representatives published the code in 1926 before revised multiple times into its current form.

The IRC is broken down into several sub categories namely income taxes, estate and gift taxes, employment taxes, miscellaneous excise taxes, alcohol, tobacco and certain other excise taxes.

Other sub categories include procedure and administration, the joint committee on taxation, financing of presidential election campaigns, trust fund code, coal industry health benefits, and finally, group health plan requirements.

Tax Accounting And The IRC

Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.

Section 446 of the IRC

Section 446 of the Internal Revenue Code, entitled General rule for methods of accounting, sets the basic guidelines for tax accounting. It emphasizes the method of accounting that should be the basis of the taxable income of the company. It also lists the acceptable accounting methods that a company may use for their tax accounting.

Permissible Accounting Methods

The computation of taxable income can vary significantly depending on which accounting method a company uses. Each method determines the timing of the revenue recognition of a company. Furthermore, it affects every the financial statement of the company, such as balance sheet, income statement, and more.

Listed below are the acceptable accounting methods according to the Internal Revenue Code:

Cash Receipts And Disbursement Method

Cash receipts and disbursement method, cash basis for short, is a revenue recognition method wherein the recognition of income and expenses is directly related to the cash inflow and outflow of the organization. Most of the time, this is because, although the company wishes to use the accrual method, some transactions are too insignificant or immaterial to use the accrual method.

The general rule is that income is recognized when cash is received, while expenses are recognized when cash is given up, regardless whether said income or expenses are earned or used. Furthermore, one major advantage of this method is that it is easier to implement than its counterpart the accrual method.

Accrual Method

Accrual method, on the other hand, is on the opposite side of the spectrum of cash basis. According to this approach, accountants should only recognize revenue and expenses when earned or used up. The accrual method disregards the movement of cash in the organization.

This method is based on the matching principle of accounting. According to the matching principle, accountants should simultaneously recognize income its respective expense when they occur, and vice versa. Finally, the accrual method is more difficult than the cash basis. However, it produces more accurate and reliable financial data. (5)

Combination of Accrual And Cash Basis

Most companies use a mix of both the accrual method and cash basis. Some companies prefer to implement different methods for different types of transactions.

An example of this would be office supplies that are very cheap. No accounting department would want to account for the depreciation for a single stapler. Hence, they would most likely, decide to recognize the stapler as an expense right away. (4)

Key Takeaway

Tax Accounting is one of the first accounting services a company should consider even during their early years. Not only will it help them monitor their tax expenses, but it can also save them from getting in trouble with the Internal Revenue Service.

The Aldris CPA Group offers various tax accounting services such as tax planning and preparation, IRS representation, and estate and trust tax preparation. Contact us or set an appointment through our website and let us help you with your tax needs.