What Is Tax Accounting?

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Tax accounting is the use of specific accounting practices to minimize a company's tax burden. Taxes represent a significant expense for a profitable business. While you must abide by Internal Revenue Service rules and federal tax laws, it is legal and common for companies to prepare distinct tax accounting statements that minimize their tax burden.

Financial Reporting Versus Tax Accounting

  • When you operate a for-profit business, you must release public financial statements. As a private company, you may have to present financial reports to creditors and potential investors. Financial reports presented to the public are often different from those submitted to the IRS under tax accounting principles. The company typically wants to project favorable earnings in public reporting but wants to minimize "taxable profits" when filing business returns.

Legal Risks

  • "Cooking the books" is an accounting idiom that describes when a company intentionally presents misleading accounting information for financial gain. Company leaders get in trouble for misleading the public in financial reports and for submitting false tax information. A business cannot violate IRS tax laws or knowingly hide taxable earnings through manipulative accounting. The demise of Enron in 2002 stemmed largely from leadership's role in false accounting for personal financial gain.

References

  • Photo Credit a-wrangler/iStock/Getty Images
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