What is Tax Accounting?

Tax accounting is made up of accounting methods focused on taxes and not on public financial statements. In the US, tax accounting is regulated by the Internal Revenue Code.

Tax accounting is different throughout the world, but in the US the IRS' Internal Revenue Code dictates what specific rules companies and individuals need to follow when they prepare their tax returns. These are often different from standard accounting principles.

Companies can account for balance sheet items differently for tax accounting and when they prepare their financial statements. For example, a company may use the FIFO (first in, first out) approach to record inventory for their financial purposes, but when they do their taxes, they will use LIFO (last in, first out) method. LIFO helps to reduce their payable taxes for the year.

In general, the purpose of accounting is to account for all the funds associated with a business or individual. Tax accounting, on the other hand, focuses only on the financial activities that are connected to the business' tax burden. In order for all applicable tax laws to be adhered to in the process, the IRS regulates all these activities for US taxpayers.