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A Brief Description of Professional Tax Accounting

The professional tax accounting deals with all the issues pertaining to the taxes. This specialized field of accounting focuses on the tax preparation as well as planning. It includes the filling of tax returns as well as making plans for the future tax obligations. The professional tax accounting completely depends upon the applied financial accounting. Thus it is advisable that the tax payer while choosing the tax accounting methods must consider financial accounting as the reference point.

The Tax Payer may compute his Taxable income by:

  1. An accrual method
  2. The cash receipts as well as disbursement methods
  3. Some other method that is allowed by the chapter
  4. A combination of the aforementioned  methods that is agreed by the secretary
The tax payer is obliged to use the same accounting methods that he uses while maintaining his books and also at the same time he must be consistent with his methods of accounting from year to year. In case the tax payer is changing his method of accounting from accrual to cash or vice versa then it is obligatory to notify the secretary.

The Accrual Method: In this method the taxpayer only includes the items when they are earned. The tests that this tax payer uses in order to decide the income earned are the “all events tests” and the “earlier of tests”. In the all events test the tax payer must include the income within the taxable year when all the events that would generate income have occurred and the right to income is guaranteed. The amount of the income can be calculated with reasonable accuracy. In the earlier of tests the tax payer receives income when all the events have occurred and the payment is either due or it has been made, whichever occurs earlier. The accrual basis taxpayer can claim deductions when all the events have occurred that ascertain the fact of liability and the amount of the liability can be determined with reasonable accuracy.

The Cash Method: This type of cash payer includes income when it is received and can claim deduction when the expenditure occurs. In general majority of the individuals begin as cash basis taxpayers. The entities that are forbidden to use the method of cash are tax shelters, corporations and partnerships.