Tax law simply refers to a group of rules defining taxation within a specific state. According to Mtetwa (Para 1), accounting is a procedure in financial business where all deals are recorded. Accounting involves keeping a record of what an organization owns and owes other organizations and individuals. Accounting forms a basis for decision making in organization (Ireland, 12). On the other hand Income tax refers to the amount levied from an individual’s earnings.
The need for the preparation and reporting of income tax has lead to the improvement of the preparation of the financial records by most organizations. Accounting of income tax calls for proper maintenance of financial records by a company. In the early days of the US, there was only minimum tax revenue that the government required in order to finance its operations. For instance, in 1812 the government imposed a sales tax because there was need for finances to pay off expenses it incurred during the war.
The need to finance the civil war in 1862 led to the US congress to enact the laws to enforce the payment of income tax in order to raise the required finances. The income tax existed since that time but it was not permanent until 1895 following the 16th amendment of the constitution of the US. The 16th constitution amendment required individuals and business to pay income tax based on their earnings.
The tax laws and accounting has been a subject of debate in the financial world because of the controversy that exists because of how they are portrayed under the US GAAPs. The controversy arises because the Internal Revenue Service does not always agree with the US GAAPs in the treatment of income taxes. The IRS uses its own tax laws which may not be in keeping with the principles of the US GAAPs. This paper seeks to address sources and objectives of modern income tax statutes and also compares and contrasts GAAP and Tax Accounting giving account of why they differ.
Sources of modern income tax statutes
Following the decline of the American Civil War, the Revenue act of 1861 was enforced. Individuals with a personal income of over $800 were required to give 3% (percent) as income tax. However the taxation was resisted until the Congress clearly defined income tax in the Sixteenth Amendment in early twentieth century.
Jacobsen and Wachterhauser PLC (Para 2) argue that income tax is the main source of revenue for the government. The constitution gives mandate to the government to collect taxes from its people. The constitution gives a definition of income tax, to which it applies to and exemptions of income taxation. The revenue raised is used to provide basic amenities, for instance to build roads. In addition the government may use the revenue to create programs that create employment and to support small business enterprises.
The executive also plays a role in becoming a source of modern income tax. The president or the prime minister plays his role in approving bill in parliament (Whitaker, 16). They therefore in their capacity contribute in the enactment of the income tax laws.
The US Internal Revenue Code (IRC)
Whitaker (18) further points out that the Internal Revenue Code (IRC) of the United States of America for instance is another source of income tax law. The legislature outlines requirements concerning income and taxation. The legislature through parliamentary proceedings present, debate and eventually come up with policies. In addition the federal courts through policies.
Another source of modern income statutes is the judiciary which translates and implements the legislature’s code. Furthermore when treaties are made between a home country and another country, new policies are introduced to control behavior. An example, a treaty may provide for free importation and exportation of goods between two neighboring countries.
Objectives of the modern income tax
In addition to raising revenue for fiscal planning of a government, other considerations include: economic, social, redistribution of wealth, political and judicial.
Economic objective of modern income tax statute encourage individuals to be self-employed and to promote private business. These interns lead to economic growth and stability within the country. In social considerations, the government statutes promote or demote certain behaviors. The governments make policies that are considerate and encouraging to citizens. For example, it provides for social security for private businesspeople. In demoting unwanted behavior, for instance, those who received bribes are fined (Whitaker 16).
In addition to the above objectives, income tax statutes have political considerations. Formulated modern income tax statutes facilitate the execution of the government and the ruling party’s political interest. This facilitation is realized through resource redistribution. For instance, the government sets the minimum wage that is to be taxed, as a result, individuals with high income, low income or no income at all benefit from public services. Furthermore, modern day income tax statutes ensure that individuals are not taxed more than once. Therefore these statutes ensure fairness (Whitaker Para 17).
Aiding International Revenue Code (IRC)
Last but not least modern day statutes are concerned with giving provisions on what, when and how the revenue is to be collected. As a result the International Revenue Code (IRC) gains support in its execution of its mandate.
Compare and contrast GAAP and Tax Accounting
Generally Accepted Accounting Principles (GAAP) refers to sets of rules that define procedures on how to record organizational transactions. Tax accounting refers to a type of accounting where there is maintenance of taxation records.
Jacobsen and Wachterhauser (Para 6) found out that there are differences between GAAP and tax accounting. First, they differ in terms of income receivable by individuals and businesses. In GAAP rental fee is accepted upon making of profit while in tax accounting accumulation of rental fee is acknowledged if there are profits. Secondly they differ in terms of payment for service. The GAAP provides its services without payment while on the other hand states gifts compensate for the services offered. Thirdly different taxation methods that are put together under GAAP are considered unique hence are taxed only when separated.
On the other hand tax accounting discourages combinations of different methods and hence taxation applies at all time. The GAAP in buying savings advocates for a free market where the buyer and seller agree on the price of a commodity whereas in tax accounting, recognition of the savings is compulsory.
Both GAAP and tax accounting give an account of the organizational financial data. However they differ in that in GAAP the data has a large audience that include stakeholders, while in tax accounting data is used by the legislature and the administrators (Jacobsen and Wachterhauser PLC 7)
Slaughter (Para 3) found out that the main purpose of GAAP is to give guidelines that will ensure that financial reports are organized systematically. On the other hand tax accounting will preserve and expand the guidelines that are concerned with profits. Slaughter says that, GAAP only uses a specific type of accounting which is the accrual accounting, whereas tax accounting uses several types of accounting which include cash and accrual accounting. This flexibility in tax accounting allows emerging enterprises to use a method of accounting that is not costly for them. Consequently business reports reflect the type of accounting method used.
GAAD require an accrual report. Expenditure shown in the financial report is a debt that must be paid. On the other hand tax accounting introduces limitations on the expenditure and profits hence an accrual report is not required. However there are instances when an accrual report is a deliberately given as a report.
Tax law and accounting is an important area of every organization and the government itself. Therefore sources of the modern income tax statutes form a basis for are enabling to the government in order to provide services for its citizen (Fujimura 1). The legislature, the judiciary and the executive are the main sources of modern income tax statutes. The main objective of modern income tax is to provide services to its citizens and redistribute resources. Other objectives include: economic, social, judicial, redistribution of resources and political considerations
GAAP and tax accounting are important features of modern income tax. They differ in their profit motive, payment of service and taxation method. They also differ in terms of their purpose. However both are financial records.
Fujimura, Daijiro. Accounting journal: Lyman Mills and its encounter with public Accountants’ inventory costing circa1920, report, 2007. Web.
Ireland, Jenifer. Principles of Accounting, 2005. London: Central Printing Service Jacobsen and wachterhauserb PLC. The CPA- Never Underestimate the Value: Arizona And federal income, 2011. Web.
Mtetwa, Munya. What is accounting?, 2011. Web.
Slaughter, Jeremy. Differences of GAAP and tax accounting, 2000. Web.
Whitaker, Cecilia. Bridging the book-Tax Accounting Gap, 2005. Web.