Tax accounting – Basics on tax accounting and 5 key principles to make a note!

If you are keen to learn about the niche of tax accounting, this blog is for you! Here we take a look at what is tax accounting, types and methods.

Tax accounting

Every individual engaged in any sector of society are liable to pay taxes to the respective government. There are certain statutory regulations that need to be followed while filing tax returns and generating tax statements. Tax accounting states down those policies and methods. In this article, we will focus on the roles of tax accountants, important facts on tax accounting, and taxes.

What is tax accounting?

Let us now try to understand what is tax accounting in appropriate legal terms. Tax services accounting or tax accounting specifies the accounting methods that are related to taxes. It states the rules and regulations to be followed by the companies or individual entrepreneurs while preparing their tax returns. The basic purpose of accounting for tax is to track the inflow and outflow of funds associated with individuals and entities. 

It is of two types mainly – Tax accounting for individuals and tax accounting for business. Besides, there are categories segregated into international tax accountants, income tax accountants, and so on.

Also read: Fair value accounting – Basics on fair value accounting & 3 examples

How is tax accounting different from financial accounting?

What is the difference between tax accounting and financial accounting?

Tax accounting is commonly known to be following the cash-based accounting method. Whereas financial accounting is based on accrual-based accounting. 

Tax accounting focuses majorly on actual cash receipts, and payments, and not on the related sale or purchase transactions. A sale or purchase transaction is not recorded until cash is received or paid. Small businesses normally use tax accounting services to easily manage their cash positions.

Companies following the financial accounting, record sales revenues and purchase expenses when they are earned and incurred. The record does not depend on whether the actual cash from sales has been collected or the actual cash for purchases has been paid.

Components of tax accounting

Let us now try to understand what are the different components of tax accounting under bookkeeping and taxes:

1. Deferred tax asset – It is the extra amount you pay as a tax on the incremental profit.  
2. Deferred tax liability – In certain situations, a company or an individual entrepreneur pays fewer taxes in the current year due to timing differences. This leads to deferred tax liability.
3. VAT Accounting – VAT is added to any invoice as part of the taxation policies. 
4. Transfer Pricing – It is paid by a company on the expenses incurred in the operating offshore office while having branches in other parts of the world
5. Income categorization – Income needs to be categorized into various heads like salary, rent, etc. Tax and accounting vary for each of the heads and must be recorded separately.

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Tax accountant types

In this section, we will discuss the different tax accountant types. The focus will be on the individual entrepreneurs and the businesses of companies. There are some differences in the tax accounting elements which you need to remember. The three key types of accountant for taxes are elaborated below:

1. Personal tax accountants

Personal tax accountants are normally attached to a particular individual entrepreneurship firm. They help in calculating the income tax accounting and file the returns on their behalf. A personal tax accountant or income tax accountant is well-versed with the accounting rules, methods, taxation policies, statutory obligations, declarations, and reporting that need to be adhered to. They even help in tax planning and advanced tax services. Their accounting tax services also include managing the taxes related to inheritance tax, income tax, and capital gains and trusts. 

2. Business tax accountants

Business tax accountants are mostly involved in tax planning and filing tax returns for large or medium-sized companies and firms. The tax accounting elements will be more and complex as compared to small businesses or individual entrepreneurs.

There will be inflow and outflow of funds and the company’s earnings from various sources. The outgoing funds can be directed towards the shareholders or some different business obligations. A business tax accountant needs to understand the complexities, the statutory and tax obligations of the region, and the audit compliances.

3. Tax Manager for Tax-Exempt Organisations

Tax-exempt organizations are the ones that are exempt from paying Federal Corporate Income Tax on the earnings from the various kinds of activities. The activities are related to the specific purposes that drive the granting of tax-exempt status.

For example, withholding tax, income that isn’t taxable, minimum wage and overtime rules, etc. may be exempt from tax. A tax manager is a person or one of the types of accountants, who guides the company in understanding the elements which can be exempted from tax. This helps in calculating the tax liabilities seamlessly.

Also read: Accounting rate of return | Everything you need to know

Federal tax accounting

Federal taxes are mainly of three types – individual income, payroll, and corporate income. The other taxes that need to be paid are excise taxes, estate tax, and other taxes and fees. It is recorded as a tax liability in the book of records.

Federal tax accounting determines when an item can be reported on a tax return file. It can be an income, credit note, or deduction. It’s a weapon to advise tax accountants and preparers on when to include an item in the tax return. The tax principles for Federal tax accounting determine which tax events must be considered.

International tax accounting

International Tax accounting deals with international accounting standards and laws prevalent across two or more countries by virtue of the tax agreements. The most common type of tax agreement is the double tax agreement or DTA. It occurs when a taxpayer is subjected to taxation on the same income in two countries, thus doubling the tax amount.

There are other international agreements or treaties dealing with special types of income or specific types of tax. International accounting for individuals and businesses is to determine the incomes that are subjected to international taxation.

Also read: What is materiality accounting & 5 practical examples

Tax accounting methods

There are primarily two types of tax accounting methods – accrual and cash basis. This is one of the most interesting tax concepts. One additional method in tax accounting is hybrid. In the accrual method, the income is recorded in the tax year when it is earned.

The most common accounting taxation method is cash basis. In this method, the income is reported in the tax year in which it is received. Hybrid is one of the tax accounting methods where some incomes are accounted for and reported through the accrual method and some through the cash method.

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Difference between tax and audit

In this section, we will try to understand the difference between tax and audit. Taxes are essentially paid towards government funding and expenses towards carrying out public works. Government levies tax on any taxable income earned by businesses and individuals. Accountant taxation or tax accounting defines to a greater extent the fiscal policy of the government. 

An audit is the evaluation and verification of the book of records, the accounts, and the different payment vouchers of a business or an individual entrepreneur. Besides, checking and validating the financial statements for correct representation is also part of audit activities.

Online tax accounting courses

There are several tax accounting courses for you to select, enroll and pursue:

• Tax preparation and law 2021, 2020, 2019, and 2018 Income tax from Udemy
• US International Tax Certificate Program from AICPA, ideal for a tax return accountant
• Taxes and Decision Making by edx.org, instructor-based online course 
• Reporting use of firm resources and taxation by edx.org  
• Taxation certificate program from UCLA with 4 courses on Tax Planning for Individuals and entities, a good course on accounting for income tax
• Certified income tax advisor program, certified tax consultant program, and certified income tax professional program from ICA for the role as a corporate tax accountant or corporate tax advisor

Also read: 10 Best accounting calculators and how to use of them

Tax accounting classes & universities

Some of the tax accounting classes & universities are mentioned below: 

• US Federal Taxation Specialization from the University of Illinois. There are 5 courses in this specialization. At the end of the course, you need to complete a hands-on project. After submission of the project, you will earn a certificate.
• Introduction to Finance and Accounting Specialization by the University of Pennsylvania. There are 4 courses in this specialization course. This course also includes a hands-on project followed by certification
• Master of Science in Taxation from Suffolk University for 46 credit hours
• Master of Tax Accounting from the University of Alabama with 30 hours of coursework

IRS tax accountant

IRS (Internal Revenue Agents or tax agent) tax accountants are entrusted with the responsibility of reviewing tax returns, forms, and claims made by businesses and individual entrepreneurs. 

Their duties include:

• Reviewing and examining annual and quarterly consumer tax returns
• Determine and assess the tax liability and overpayment of a business
• Conduct an audit and evaluate the financial statements and the book of records 
• Analyze and prepare revenue reports for the Treasury Department of the United States
• Determining whether the right amount of tax has been paid by a business or an individual tax-paying entity
• Reviewing tax-exempt organizations to ensure that they comply and adhere to the tax-exempt regulations

Also read: What is fund accounting – key principles, & responsibilities

What is a tax manager?

Let us now try to understand what is a tax manager. A tax manager is essentially a certified tax accountant, assisting in easy tax and accounting services. The person is an expert, specializing in taxes related to federal, state, and local tax laws. One must possess knowledge of the Microsoft suite of products especially spreadsheets. In qualification, they may be CPA for taxes. Experience and expertise in the industrial domain coupled with knowledge of accounting tax service are important.

Kuntala Banerjee

Kuntala is a versatile writer with a focus on diverse areas around work, productivity, collaboration at work, hiring, management, HR, and training. Her background of past experience in technology and consulting helps in molding razor-sharp insights into the research and user-focused content she creates. Professionally she is an IT consultant in a sales role and also a writer of short stories and poems, travel blogger, and fashion influencer.