Tax Law And Accounting (GAAP)

Tax Law and Accounting

Income tax is a part of the fiscal policy of our economy. The first federal income tax was imposed by Congress in 1862, to finance the waging of the Civil War. The Civil War income tax was repealed in 1872, but a new income tax was enacted as part of the 1894 Tariff Act. However, the Supreme Court struck down the income tax in 1895. It ruled that the portion of the income tax that applied to income on property was a direct tax that, under the United States Constitution, could not be levied without apportioning the tax by population. In 1913, the states ratified the Sixteenth Amendment to the United States Constitution, which made possible modern income taxes (Taxation).

The sources of the modern income tax statutes

GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information." Thus GAAP, (Generally accepted accounting principles), which help in achieving the above objectives whilst preparing financial statements, including the company's balance sheet, income statement and cash flow statement. Moreover principals are necessary to allow the economy to function efficiently, because decisions about the distribution of resources rely heavily on credible, concise, and understandable financial information. Financial information about the operations and financial position of individual companies is also used by the public in making various kinds of decisions.

GAAP is based on prevalent industry practice; Accounting Principles Board (APB) statements and opinions; Financial Accounting Standards Board (FASB) statements, concepts, technical bulletins and interpretations; American Institute of Certified Public Accountants (AICPA) statements, issue papers, bulletins, interpretations and concepts; as well as various other professional announcements, textbooks and

The major differences can be timing and recognition differences. The timing difference involves revenue such as prepaid rent for GAAP and tax return purpose. In addition, timing differences can be due to different methods of valuing assets like different depreciation rates under GAAP and tax accounting rules. Additionally there is difference in how are taxes reported in GAAP and Tax accounting. GAAP reporting does not accurately present taxes paid. Tax reporting does not accurately reflect the useful life of the equipment. Another can be recognition of the liabilities or income or expenses. When rental fees are collected in advance the GAAP, applied rent revenue recognized when earned. The tax code applied the rent collection considered as taxable income (New York Life).

The recognition differences can be the permanent differences where some income and expense items being recognized under GAAP but not for tax purposes, or vice versa. For example, certain incomes which are tax exempted will not be considered in tax accounting. Similarly some expenses can be non deductible under tax accounting. Another difference can be revenue municipal bonds. In GAAP, the revenue recognized as interest is earned. According to the Tax Code, the interest revenue is exempt from federal