Tax Accounting

Chapter 3 

Tax Accounting

What is Tax Accounting

Tax accounting is a structure of accounting methods focused on taxes

rather than the appearance of public financial statements. Tax

accounting is governed by the Internal Revenue Code, which dictates

the specific rules that companies and individuals must follow when

preparing their tax returns.

3.1Depreciation

What is Depreciation

Depreciation is an accounting method of allocating the cost of a

tangible asset over its useful life and is used to account for declines in

value. Businesses depreciate long-term assets for both tax and

accounting purposes. For tax purposes, businesses can deduct the

cost of the tangible assets they purchase as business expenses;

however, businesses must depreciate these assets according

to IRS rules about how and when the company can take

the deduction.

Depreciation

BREAKING DOWN Depreciation

Depreciation is often a difficult concept for accounting students as it

does not represent real cash flow. Depreciation is an accounting

convention that allows a company to write off an asset's value over

time, but it is considered a non-cash transaction.

Depreciation Example

For accounting purposes, depreciation expense does not represent a

cash transaction, but it shows how much of an asset's value the

business has used over a period. For example, if a company buys a

piece of equipment for $50,000, it can either write the entire cost of

the asset off in year one or write the value of the asset off over the

assets 10-year life. This is why business owners like depreciation.

Most business owners prefer to expense only a portion of the cost,

which artificially boosts net income. In addition, the company can

scrap the equipment for $10,000, which means it has a salvage value

of $10,000. Using these variables, the analyst calculates depreciation

expense as the difference between the cost of the asset and the

salvage value, divided by the useful life of the asset. The calculation

in this example is ($50,000 - $10,000) / 10, which is $4,000.

This means the company's accountant does not have to write off the

entire $50,000, even though it paid out that amount in cash. Instead,

the company only has to expense $4,000 against net income. The

company expenses another $4,000 next year and another $4,000 the

year after that, and so on, until the company writes off the value of

the equipment in year 10.

Depreciating Values

Besides an accounting convention, companies also use depreciation

to refer to the loss of market value. Currency and real estate are two

examples of assets that can depreciate or lose value. During the

infamous Russian ruble crisis in 1998, the ruble lost 26 percent of its

value in one day. During the housing crisis of 2008, homeowners in

the hardest-hit areas, such as Las Vegas, saw the value of their homes

depreciate by as much as 60 percent

3.2 Reduce Your Tax Burden

For many people, taxes will be their largest expense over their

lifetime. In addition, income taxes are often linked to many other

areas of our financial lives. Income taxes can affect how much money

we have available to spend, when we can retire, the return that we

get on our investments, and even how our financial affairs are

conducted after we pass away. Yet, many people spend very little

time thinking about how they can legally reduce their income tax

burden or better coordinate their income tax planning with other

areas of their financial lives.

At Planned Solutions, we believe that no financial plan is complete

without a review of how a client’s income tax situation can be

managed to reflect their financial goals. When it all comes down to it,

financial goals are most often funded with a client’s after-tax

financial resources. Therefore, reducing the income tax burden may

free-up financial resources that can be used to fund other goals.

Tax Preparation

As part of our services, we prepare income tax returns for clients –

and others looking for a trained professional to complete their taxes. 

Our fees are competitive with the major chains and tax firms.

We pride ourselves on preparing thorough and accurate tax returns

and helping clients do appropriate tax planning – matching

withholding or estimated tax payments with expected income rather

than over-withholding; maximizing the use of appropriate

deductions; and planning ahead for required minimum distributions

.

3.3 What Is Analytical Exposition?

Tracking costs and revenues is one of the most fundamental internal

procedures an organization can utilize. In business, analytical

accounting is a name for the financial component of project

management. It relies on financial data to make determinations

about how, when and why a business spends and receives money.

Analytical Accounting Overview

Analytical accounting uses many of the same financial measurements

that businesses track and record for their budgeting and financial

statements. The key difference is that it displays financial data in a

number of ways based on an analyst's needs and questions, rather

than simply balancing accounts. For example, a project manager

overseeing a new product launch may this method to review

marketing costs week-by-week or from one geographic location to

another.

Analytical Accounting Tools

Most analytical accounting uses software tools to make the process

accurate and to reduce the time it takes to compile and organize

data. Computer programs from major software makers enable users

to create modules, or plans, that track specific types of costs and

revenues. Large businesses may create their own software to serve

their specific needs or address the types of costs and revenues their

industry generates. Analytical accounting tools are similar to, but not

the same as, general accounting software, although some general

accounting programs include basic analytical functionality.

Reasons for Using Analytical Accounting

Businesses use analytical accounting for several reasons, all of which

rely on the additional information it makes available to assist with

decision making processes. One purpose is to identify costs that arise

over time with hopes of reducing them. This is also a useful way of

recognizing temporary or regionally specific revenue increases so

business leaders can attempt to sustain them. In a more general

sense, businesses can develop more personalized views of their

finances, which have more value to managers.

Investment and Interpretation

To perform analytical accounting, a business needs to invest in both

software and personnel to manage the system. This means taking on

a considerable cost with uncertain results. Managers also need to be

able to interpret the data and use it to make strategic decisions. This

means that analytical accounting, on its own, has limited utility.

However, in an ideal scenario, a business can use it to reduce project

costs, accurately project revenue and gain a competitive advantage in

its industry.