Tax accounting



U.S. tax accounting refers to
accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been calle ...
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal person, legal entity) by a governmental organization in order to fund government spending and various public expenditures (regiona ...
purposes in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
. Unlike most countries, the United States has a comprehensive set of accounting principles for tax purposes, prescribed by tax law, which are separate and distinct from
Generally Accepted Accounting Principles Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...

Basic rules

Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 ...
governs the application of tax accounting.
Section 446
sets the basic rules for tax accounting. Tax accounting unde

emphasizes consistency for a tax accounting method with references to the applied financial accounting to determine the proper method. The taxpayer must choose a tax accounting method using the taxpayer's financial accounting method as a reference point.

Types of tax accounting methods

Proper accounting methods are described i

which permits
cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-immed ...
accrual Accrual (''accumulation'') of something is, in finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribu ...
, and other methods approved by the
Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service for the Federal government of the United States, United States federal government, which is responsible for collecting Taxation in the United States, U.S. federal taxes and administerin ...
(IRS) including combinations. After choosing a tax accounting method, unde
section 446(b)
the IRS has wide discretion to re-compute the taxable income of the taxpayer by changing the accounting method to be used by the taxpayer in order to clearly reflect the taxpayer's income. If the taxpayer engages in more than one business, the taxpayer may use a different method for each business according t

Tax accounting method changes

If the taxpayer wants to change a tax accounting method, section 446 of the Internal Revenue Code requires the taxpayer to obtain the consent of the Internal Revenue Service. There are two kinds of changes: obtaining a letter of approval from the IRS, and obtaining a series of more routine changes, each of which is an automatic change. To get the automatic change, the taxpayer must fill out a form and return it to the IRS. The taxpayer can adopt another method if the taxpayer files a tax return using that method for two consecutive years. This is different from changing a tax accounting method under the release of the IRS because, in the case of adopting another method, the IRS may assess fines and reallocate taxable income. If the taxpayer wants to return to the previous method, the taxpayer must ask for permission from the IRS, following th

procedure. If the taxpayer fails to request a change of method of accounting then, according t

the taxpayer does so at his or her own peril by exposure to penalties.

Comparison with other countries

In many other countries, the profit for tax purposes is the accounting
profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting, is an income distributed to the ownership , owner in a Profit (economics) , profitable market production process (business). Profit is a measure of profi ...
defined by GAAP (coined the term "book profit" by the 18th century scholar Sean Freidel), with such additional adjustments to book profit as are prescribed by tax law. In other words, GAAP determines the taxable profits, except where a tax rule determines otherwise. Such adjustments typically include
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estim ...
and expenses which for policy reasons are not deductible for tax purposes, such as entertaining costs and fines. But the U.S. is not the only jurisdiction in which there is a wide divergence between tax and financial accounting. Hugh Ault and Brian Arnold, in their book "Comparative Income Taxation," have observed that in The Netherlands, where financial accounting is known as "commercial accounting," there is a substantial divergence between those and the tax books. " fferences between tax and commercial accounting rules arise where the tax instrument is employed to pursue economic, social and cultural purposes," write Ault and Arnold.

See also

Accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been calle ...
Financial accounting Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of Financial statement audit, financial statements available for p ...
* Accounting period * All-events test * Corporate tax in the United States * CPA Magazine {{Accounting navbox Accounting in the United States Taxation in the United States Tax accounting Types of accounting