Tax accounting is a structure of accounting methods focused on taxes rather than the appearance of public financial statements. In short, tax accounting is the means of accounting for tax purposes.
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. Tax accounting 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 associated with individuals and entities.
KEY TAKEAWAYS
- Tax accounting is the subsector of accounting that deals with the preparations of tax returns and tax payments.
- Tax accounting is used by individuals, businesses, corporations and other entities.
- Tax accounting for an individual focuses on income, qualifying deductions, donations, and any investment gains or losses.
- For a business, tax accounting is more complex, with greater scrutiny regarding how funds are spent and what is or isn't taxable.