Importance of Taxes in a Company

Companies file taxes yearly.

Every company must pay taxes on its income. Accurate and timely tax reportage is necessary for a company to conform to accepted accounting principals (GAAP) and the Internal Revenue Code, as well as raise adequate capital.

Generally Accepted Accounting Principles (GAAP)

Statement Number 109 requires company financial statements to include income tax results. Investors trust the veracity of financial statements because GAAP uniform rules apply to all companies. Violating GAAP will decrease investor confidence, which in turn leads to a decrease in funds from investors. Violating GAAP can also cause a company to suffer repercussions with the Securities and Exchange Commission.

Internal Revenue Code

Under the Internal Revenue Code, if a company does not pay taxes or fails to file taxes, it is subject to both civil and criminal penalties varying from 5 percent to 0.5 percent interest on the unpaid tax due per month. The company must pay for these taxes out of earnings, which decreases net earnings for the year and leads to less return for shareholders.

Raising Capital

A company that produces income can reinvest that income into its capital. However, paying taxes decreases the amount of money a company can invest. Using proper tax planning, it can limit its tax liability, which in turn allows for more money to reinvest or to pay out to owners and shareholders.

References

• IRS: Small Business and Self-Employed Tax Center
• Investopedia: Accounting and Taxes, Like Peanut Butter and Jelly
• Business Week: Rules for Raising Capital
• WWWeb Tax: Tax Penalties and Interest, IRS and Tax
• FASB: Summary of Statement Number 109