Tax and Accounting
Accounting for Income Tax
Tax filing controversies have been exposed in the recent years. Since then, corporations have become vigilant in ensuring their accounting practices especially those that affect the calculation of taxes, are ethically sound. Companies may want to apply an accounting method that would accelerate accounting income into the current year. The rate at which expenses are taken up in a current accounting period may be slowed down. In contrast, the objective of tax accounting is for the company to pay a smaller amount of taxes in a legal way. Tax laws are employed so that income will be postponed to future tax periods. Companies can find accounting methods that will help accelerate tax deductions and tax breaks.
Tax avoidance is a legal way to exploit tax laws to the advantage of the individual. It is an attempt to lessen the amount of tax payable by certain means that are within the bounds of law while fully disclosing all the information needed by the tax authorities. Tax avoidance may be in the form of tax deductions made to appear as tax breaks and structural changes in business through incorporation. In contrast to tax avoidance, tax evasion involves taxpayers who intentionally do not disclose all their financial information to reduce their tax filing liabilities. This includes deliberate and dishonest practices such as the under declaration of income and profits. Tax avoidance may be considered as the avoidance of performing one’s duties of paying taxes. It may also be considered as a citizens’ right to avoid paying too much taxes. Tax evasion is considered a crime as people who are found guilty of such a crime are imprisoned and fined. Tax evasion happens when the taxpayer will deliberately escape his obligations to pay taxes by resorting to fraud and deception. Individuals as well as corporations, are expected to pay the appropriate federal tax and state tax as mandated by the law.
The GAAP method of accounting is more involved in coverage than tax accounting. GAAP can provide more details about the daily financial status of the company that may not always be related to taxation. GAAP also has great accuracy in presenting statements of assets and liabilities of the company. Tax accounting has fewer regulations and principles than GAAP because the method makes it easy for users to see their financial status at any given period. However, tax accounting is not a reliable source for statements of assets and
liabilities. GAAP has a greater consistency when it comes to reporting because the method makes use of industry standards. It is also not subject to changes that frequently occur in tax accounting in a given year.
It is not only in the rules and principles that the two methods differ. The objectives of the business come into play as well. GAAP provides a guide for companies that they must follow so that they can present the accounting income of the business. GAAP allows a little flexibility and allows companies to select from the many acceptable methods of accounting. For purposes of financial reporting, companies are most interested in ensuring that the company will be viewed by creditors and potential investors as a thriving business organization. If companies will be given the chance to choose from among the accounting methods, they will choose the one that reflects the highest net income.
Tax research involves the process of answering questions on taxation that are needed by the researcher. The process of tax research has many steps. The tax researcher should ensure that he is efficient in his work because this type of professional services can be very expensive for the company or the client. The process can also be described as the similar to legal research. The goal of the researcher is to find the authority and assess its usefulness. The results of the research can then be applied to certain situation.
The tax researcher should first identify the issues to know what areas of study the researcher will search for answers or solutions to the problem. The results of the tax research are not conclusive because they may still be contested because of bias or lack of evidence and authority. The tax researcher should determine the relevance of the authority to the issues. Determining the importance of such authority will not always be straightforward to provide a conclusive answer to the issues at hand.
Tax planning for federal tax and state tax is done every year. Individuals can plan their income and formulate deduction strategies to reduce taxes. Tax planning strategies include deferring a certain amount of income to a later year in which less tax is expected to be paid. Tax planning is used to generate savings from paying high taxes. Another strategy is to engage in tax-free investments. Tax planning can lead to unethical behavior if the process is abused by individuals who have intentions of evading taxes. It is unethical to go beyond the limits of what is allowed by the law.
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