- Describe the unique way the government uses accounting information
Back in the early twentieth century, Congress enacted a tax on businesses based on profits. At the time, it was just one percent of net income in excess of $5,000. A few years later, Congress passed the law to create an individual income tax, and over the years, many states followed suit, passing their own income tax acts.
Before that, most taxes were excise taxes, which means they were imposed on individual items, like alcohol and cigarettes, and accounting for those taxes was fairly straightforward. However, as the tax law has become more pervasive and more complicated, it has also become more and more dependent on accountants to provide the information needed to correctly assess the tax, as well as the expertise to minimize it. In fact, it’s one area of the law where accountants have more expertise than attorneys.
Today, taxes based on income, sales taxes, and payroll taxes make up the vast majority of federal and state revenues. For the most part, taxable income is calculated the same way as net income for other external users, like banks and investors, with some important differences. Since the Internal Revenue Code (IRC), if it were printed out, would be several thousand pages of complex legal jargon, what follows is only a sample of the ways tax accounting can differ from financial accounting:
- Penalties: often considered a cost of doing business (expense) for business purposes, the IRC doesn’t allow civil penalties (like parking tickets) to be deducted from income
- Meals: because of past abuses, the IRC limits meal expenses to 50% of what the business reports to other external users
The IRC also either requires or allows different ways of deciding when to record money coming in or going out. In fact, state income tax laws are often different from the federal laws, so the financial accountants for a business may have to keep several sets of records:
- Managerial accounting for internal users
- Financial accounting for external users
- Tax accounting for governmental reporting
Deadlines are extremely important in accounting, and especially so in reporting to the government. Business returns have specific deadlines. For instance, payroll tax reports and deposits may be quarterly or monthly depending on the amount of payroll, and corporate tax returns are due on the 15th day of the third month following the end of the fiscal year. All of the complex rules of tax and other governmental reporting means that the accountant has to be well educated and must stay current with any changes in the law.
As you’ll see, accountants have a big job to do, and a lot of rules to follow.