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Tax Accounting Methods and its Benefits

The Tax Accounting method focuses on tax issues. This includes all the activities related to filing of tax returns and planning for future tax obligations. The specialization of accounting focuses on tax preparation and planning. The tax accounting is governed by Internal Revenue Code. The tax accounting method chosen depends on applied financial accounting. So, the taxpayer must choose a tax accounting method considering financial accounting method as a reference point.

In General, Tax Accounting Systems Can be Segregated into Two Types:

  • Accrual tax accounting
  • Cash tax accounting
Selection of appropriate tax accounting system depends on the goals and business plans of the company. For a proprietor of a small company, whose main objective is to develop legal compliance with the federal tax authorities utilizing tax-based accounting system or the cash system would be beneficial as compared to the accrual method.

In order to change the method of tax accounting, the tax payer is required to acquire the consent of the Secretary of the Treasury. In order to get an automatic change, the taxpayer must fill a form and send it to the Secretary of the Treasury.

The tax payer can adopt another method of change of tax accounting by filing for tax return using that method for two consecutive years. This method is different from changing a tax accounting method because by adopting another method the revenue services may assess fines and reallocate taxable income.

Some of the Advantages of Using Tax Accounting are:

  • Record-keeping: Tax based accounting eliminates a lot of unnecessary record-keeping that is not always needed by the company owner or managers.
  • Faster decision making by monitoring the financial aspects of the true nature of the business.
  • Accurate budget: Implementation of the tax-based accounting system also allows business owners to make better budgets and acquisition forecasting predictions for the concerned company. The business owners have a better idea about their true profit and loss margins.
  • The company shows goodwill for its legally compliance in regard to business tax matters.