Accounting plays a very important role for any organization, be it a start-up or a well-established business entity. The reach of accounting in setting up a business has leveraged extensively and because of that many sub-categories have been discovered under accounting. One such category is Tax Accounting. The term ‘Tax Accounting’ refers to accounting done for taxation purpose and is governed by Internal Revenue Code (IRC) that specifies the guidelines that are to be followed by an individual or an organization while filing a tax return. It is dedicated to preparation, analysis, and presentation of tax returns and tax payments and is also known as cash-based accounting and tax laws vary from countries to countries. It covers the tax based on income that covers Business Tax, Custom Tax, Payroll Tax, Withholding Tax, Corporate Tax, Capital Gain Tax, and Transfer Tax.
Essentials of Tax Accounting
The concept of tax accounting is mainly to deal with tax to provide transparency in relation to the tax. To maintain a transparent calculation of tax and comparison, the procedure of tax accounting must include calculation of:
1. Current Year
Here, the tax liability or tax asset is recognized on the income payable or refundable of the current year.
2. Future Year
The deferred tax liability or tax asset is estimated based on the future carryforwards.
Difference between Financial Accounting and Tax Accounting
Financial accounting is a process that contributes a lot towards the development of financial statements and financial reports. Since the new concept of tax accounting has been accepted, let’s see the difference between financial and tax accounting:
- In financial accounting, the company records the revenue from sales and purchase expenses whereas in tax accounting a record is made only when cash is received
- Financial accounting is followed by large organizations whereas tax accounting is followed by small organizations
- The main aim of financial accounting is to determine sale or purchase transaction date, whereas in tax accounting the main aim is to impose a tax on the net earnings of the business
- Financial accounts mostly deal with sale or purchase transaction whereas tax account deals with cash payments and cash receipts
Use of Tax Accounting
The concept of tax accounting can be utilized for both the individual and business front at their respective levels and nature. Let’s see how tax accounting is implemented on both the individual and business front:
1. Tax Accounting for Individuals
When it comes to calculation of tax accounting for an individual it includes core items such as income earned, qualifying deductions, investment gains or losses, and simultaneous transactions that affect the tax burden of an individual.
Tax Accounting for Business
If we consider from the business point of view, the information needs to be refined and analyzed to a larger extent. The incoming funds for a business are tracked in a similar way that of an individual but the complexity arises while calculating the outflow. The cash-outflow directs towards specific business expense as well as towards shareholders.
Tax Accounting Calculation Framework
Tax accounting is calculated by two different methods: Accrual Method and Cash Method.
1. The Accrual Method
Under this method, the income is registered when the payment is made due, liability is registered when the expense is due.
2. The Cash Method
Here, the income is calculated when the cash is received, and the liability is recorded upon any payment made.
Also, the basic tax accounting framework includes three steps:
- Calculate current income tax
- Calculate deferred income tax
- Financial reporting for current and deferred taxes
UAE Federal Tax Authority and Tax Accounting in UAE
The accounting standards in the UAE are based on the standards set by the International Financial Reporting Standards (IFRS). The introduction of taxation system by the Federal Tax Authority (FTA) UAE is a part of GCC with the intention to diversify the regional economies and expand business reach globally. As we have seen tax accounting has captured the global market, its importance and need have been accepted at an international level be it for individual or corporate use. Just like the count of chartered accountants in Dubai has rapidly increased in Dubai, the tax accountants have also been continuously increased at a speeding rate. The Federal Tax Authority UAE in 2017 has taken a step to initiate the registration process opened for tax agents, tax accounting software vendors in the Emirate.
Role of a Tax Accountant
A tax accountant is a certified public accountant professional that holds a specialization in taxation field. They are trained strictly considering all the complexities for individual and business clients. The training is in depth and detail similar to that provided to a chartered accountant. These professionals are either Certified Public Account (CPA) or Enrolled Agent (EA). Some of the special skills that any tax accountant should possess include Strategic Planning, Financial Diagnosis, Ability to deal with the complex situation, Result- Driven etc. Some of the specific roles that a tax accountant is responsible for include:
- Preparing property tax return, municipal returns, extensions for filing state, federal and local tax documents
- Researching to build tax strategies to fix local, state and federal taxation issues
- Identifying the possibility of profit that could be earned by potential business merger and acquisition
- Reviewing and streamlining the procedure of tax calculation
- Reviewing, interpreting and implementing new or revised law to hold an upper hand in the legislative materials
Importance of Tax Accounting
Till now you have seen and understood the basic concepts of tax accounting. Payment of tax is a compulsion for any business under this business planet. Even a minor fault could result in a heavy business loss. Tax accounting is totally dedicated to the tax domain that is essential for individuals as well as for any business. Now, let’s understand the importance of availing tax accounting and the reason behind its tremendous growth:
- International taxation
- Economic taxation
- Transfer pricing
- Complete control over budgets
- Provides a true picture of profit and loss
- Enables faster decision making
JAXA Tax Accounting Services
- Developing tax validation projects
- Preparing balance sheets on the basis of tax to give a clear picture
- Drafting income tax and reporting documents
- Keeping a check on the current accounting laws for any changes and applying the same
- Dealing with merger & acquisition process
- Understanding and dealing with tax risk
Why Outsource with JAXA Tax?
JAXA, since its inception, has been dealing with the financial front of the various business. Sorting the tax issues is one of the core domains of the firm. Our team of offer prepares tailor-made solutions that suit the business entity based on the nature of the business it is involved in. On-time delivery of solutions and projects is another important feature that we strictly follow. We have a wide range of satisfied clients globally dealing with different businesses. To become a part of our network, do contact us. We would be happy to assist you and deal with the tax structure of your business.
What is a current tax?
The total amount of tax debt held by an individual or a corporate entity to a taxing authority is stated to be the current tax.
What is deferred tax?
A situation wherein the business entity has paid excess tax then the required amount and is covered as an asset named advance tax paid on the company’s balance sheet.
What is transfer pricing?
Transfer pricing refers to the price that is charged upon the transfer of physical goods between businesses located under same or different tax jurisdiction.
How many types of accounting are there in the accounting domain?
There exist almost 8 different types of accounting under the accounting domain.
What is a double tax treaty?
A double tax treaty is an agreement signed between two countries in order to avoid the double taxation that takes place during the import and export of goods.