Tax Accounting: Overview, Types, Services, Needs, and Considerations For Services

Tax accounting isn’t new in the world of finance. It is an obligatory practice that needs to be performed by every individual or a big corporation. But what it actually is and why businesses are legally mandated to perform this makes this a light-shedding topic of concern. 

In simple words, accounting tax is an accounting connected to the computation of tax liabilities of individuals and business entities. Its only purpose is to manage taxes and to make sure that taxes are being paid on time.

In today’s article, we’ll learn about tax accounting, its types, why we need them, and many more. So let’s get into it.

What Is Tax Accounting?

Tax accounting is a crucial accounting practice performed in all kinds of businesses, irrespective of their scale. Businesses set up specialized departments to manage their taxes and pay off their liabilities. Some primary responsibilities of tax accountants​ in this kind of accounting are filing taxes, taking returns, and establishing tax-related policies. 

The computed tax or tax liability of businesses is meant to be submitted directly to the government; failing or neglecting this can result in huge fines, penalties, and even imprisonment. Tax accounting keeps tabs on all the income that is being generated, donations that are being made, investments that are being done, or the loss that has occurred.

It monitors all this so that there won’t be a burden on the taxpayer. The person handling your tax is known as a tax consultant or tax accountant, and it’s their job to make sure taxes are paid on time and reports are being filled on time. 

If you are not in a position to hire an in-house accountant, try opting for tax outsourcing services. 

Types of Tax Accounting

There are different types of tax accounting, each being used according to the need. The following are the three important types of it: 

Individual Tax Accounting

This type of tax accounting handles the preparation and filing of personal taxes on the basis of salary, capital gains, rental income, interests, commissions, royalties, etc. It is performed to calculate the tax payable on the total earnings of an individual in a financial year. These taxes will only be paid by residents of a country and not by the NRIs.

Corporate Tax Accounting

Another type of accounting tax is corporate tax accounting, which is concerned with figuring out the taxes that need to be paid by business entities. These taxes are way higher in comparison to individual tax accounting. It is an intricate process as it encompasses qualitative and quantitative aspects of taxes. The accounting of these taxes is required to be done more thoroughly and needs to be managed well.

Tax-Exempt Organization Tax Accounting

Accounting for tax-exempt organizations is done for all non-profit organizations like NGOs, trusts, professional associations, etc. These organizations need to show their fundraising sources and utilization of their collected capital. This is to make sure that money wasn’t used for anything illegal and was used for good causes of helping others.

Main Tax Accounting Concerns 

The necessity of tax accounting services is caused by commonly occurring tax accounting concerns. Thus, here we have provided all the main tax accounting concerns: 

• Tax Compliances: One of the most common tax accounting concerns is considered to be following and complying with the frequently changing rules and regulations concerned with tax. Neglecting these can result in huge penalties in the form of a tax bill called determination. 

• Income Categorization: Another hassle-making and one of the main tax accounting concerns is identifying different types of income and treating them according to their nature, like basic salary, allowances, bonuses, commissions, retirement benefits, etc. 

• Tax Deferrals: It is concerned with understanding the difference between accounting income and taxable income to identify future tax implications. 

• Overlooking Tax: This concern is mostly seen in the new setup businesses, where the business has recently started making an income. Thus, opting for a tax accounting service is advisable to avoid all the troubles with tax authorities. 

• Cash Flow: The tax computation has a direct impact on the cash flow of a business, as the time when an income is recognized for tax directly affects the amount of tax payable. This can cause fluctuations in the actual cash outflow of the business. 

Critical Services in Tax Accounting

Tax accounting comes with several services in the form of packages, and individuals or entities can choose what service they need to avail of by picking their packages. Common services provided are as follows: 

Tax Preparation

As the name suggests, all the information regarding an individual’s or organization’s finances is collected, and this information will be used to file tax returns.

Tax Planning

It is concerned with thoroughly assessing the financial situation of businesses so the burden can be lessened from the payers’ shoulders and tax benefits can be taken to their fullest. It also helps in planning for the future, keeping all the claiming decisions, credit benefits, or every other element in mind. 

Tax Compliance

This service is mainly associated with ensuring that the performed tax practices comply with different tax laws and regulations. It is an important service to observe tax obligations, including fines and penalties. They also help in organizing documentation.

Tax Audit Representation

Accounting professionals in tax audits represent clients to official authorities or government entities so that their compliance can be shown. The tax accountant world as the representative. Tax accountants submit documents and materials and reply to telephone calls and questions. They also resolve other disputes that appear during the audit execution process.

Tax Problem Solving and Advisory Services

A tax accountant will handle any tax-related problem, whether it is a business operation, inheriting wealth, tax structures of proposed investments, or anything else. It’s their job to handle all these problems. 

Need for Tax Accounting Services 

Tax accounting is an important accounting practice for the following reasons:

• Civic Obligation: It makes sure that all the parties are paying them on time and how much they are supposed to. Having a good accounting tax system also eliminates the threat of any legal trouble.

• Management of Relative Risks: Management and tax accounting are intertwined because they both go with each other. All the related decisions would be made in advance so that it could minimize all types of risk in the future.

• Taking Advantage of Available Deductions and Credits: Tax accountants make sure that their clients are using available tax deductibles to reduce their taxable income, ultimately reducing the payable taxes. This could also lead to savings and better financial management of retained earnings.

• Strategic Decision-Making: Tax accounting assists associating parties in making decisions strategically. These decisions, mainly linked to investing, business operations, capital, etc, directly affect your taxes. 

Considerations to Find the Best Tax Accountant for You

Finding a top-notch accounting service is always going to be important; it doesn’t matter if you are looking individually or for a firm. Here are a few points that will help you find a trustworthy tax accounting service: 

• Specializations and Practiced Areas: There are thousands of accounting services available in the market, so you’ll have to look according to your needs. Look for an accountant specialized in the industry, interest, or work. If we take an example, let’s just say you are an entrepreneur, so you’ll be looking for an accountant who specializes in corporate taxation or someone who performs all types of tax accounting. 

• Credibility: Choosing a reputed and trusted accountant is important. Don’t just pick anyone with low charges and make them your accountant. Take recommendations from known people and use referrals to get offers. Selecting an experienced service provider can help you save a reasonable amount of taxes from your earnings. 

• Professionalism: A tax accountant always needs to communicate professionally to solve the arising issues. Make sure the chosen tax advisor directly communicates with their clients, and they appreciate their clients and their cooperation.

• Fees: While hiring a tax accountant for yourself, make sure that their fee is affordable and the offered services are sufficient. 

Conclusion

Considering the significance of tax filing and computation, opting for tax accounting services is the only option for individuals and business entities. It not only helps in formulating calculations for tax obligations but also safeguards you from delving into violation of tax rules and regulations. 

If hiring a good in-house tax accountant is not an affordable deal for you, try outsourcing your self-assessment tax return.