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+1-802-778-9005Tax accounting is the process of assessing and calculating taxes, preparing and filing tax returns according to IRS regulations, replying to IRS notices and letters, conducting tax audits, and adhering to IRS guidelines.
In the USA, there are three kinds of tax systems, which are:
Similarly, there are two broad categories of taxes:
Small business owners must understand and be aware of tax rules and regulations to avoid penalties, fines, etc. Maintaining tax-related documents and an audit trail is important in case of an investigation or for filing for tax credits, exemptions, or supporting evidence for deductions.
A taxpayer could be an individual, business, corporation, or other entity. Tax accounting helps determine how much a taxpayer owes in taxes.
In the USA, the IRS (Internal Revenue Code) governs and implements taxation-related laws, which describe the rules and regulations followed by taxpayers.
Tax accounting helps businesses easily identify areas for revenue optimization, cost savings, and resource allocation. It also ensures that individuals or businesses accurately file their tax returns on time, report their tax liabilities, and adhere to the tax payment deadlines.
The tax accountant professionals help the business determine its total taxable income (the company’s annual income after expenses) and minimize tax liability while following the tax code. The procedure includes all the elements of tax accounting.
It defines the company’s revenue, costs, and expenses over some time. It frequently displays the amount of money the business earned before taxes, which helps the tax accountant determine whether profits are subject to taxes and what obligations the business has.
Liabilities are of two types:
Cash or accrual are the two techniques that organizations must employ according to IRS regulations. The business records revenue in the period that is received by using cash-based accounting.
Therefore, revenue would be recorded and reported in tax returns in the next year if it received an order for products it sells late in the year, but no money changed hands until after the first of the following year.
By using the accrual basis method, businesses can record revenues and expenses as they occur rather than when money is actually transferred.
In the U.S. taxation system, all levels of government, from federal to state to municipality, have the authority to tax, legislate, and regulate. Understanding who has authority over a particular matter is very important.
The federal, state, and municipal governments in the United States impose various taxes. These include income, payroll, property, sales, capital gains, dividends, imports, estates, and gifts.
The United States levies taxes on the income of its citizens and residents globally. One of the unique aspects of the U.S. taxation system is its treatment of non-resident citizens. All the non-resident aliens are taxed on their income sourced in the U.S. and functionally related to a U.S. trade or activity.
Everyone has to pay taxes as per the U.S. taxation system:
S corporations, or corporations wholly owned by citizens or residents of the United States, have the option to choose to be treated like partnerships. Certain additional business entities, such as limited liability companies, have the option of being regarded as partnerships or corporations. Partnership do not pay income tax. The partners do include their portions of partnership items in their tax calculations.
With the passage of U.S. tax reform legislation on December 22, 2017 (P.L. 115-97), the U.S. transitioned from a “worldwide” to a “territorial” tax system.
P.L. 115-97, among other things, permanently lowered resident corporations’ 35% CIT rate to a flat 21% rate for tax years starting after December 31, 2017.
For non-US persons, the U.S. taxation is determined by two key factors:
These factors play a crucial role in deciding whether their income is subject to U.S. taxation or not.
Tax returns in the United States are reports submitted with the Internal Revenue Service (IRS) or a state or local tax collection body that contain information used to calculate income taxes or other taxes. Tax returns are prepared using forms provided by the IRS or another applicable taxing authority.
The U.S. tax system is built on the premise of self-assessment and voluntary reporting. A corporation taxpayer must file an annual tax return (usually Form 1120) by the 15th day of the fourth month following the end of the tax year.
A taxpayer may request an additional six-month extension of time to file their tax return. If you fail to file your return on time, you may face fines. Additional fines may apply for late returns on certain information returns that must be filed on time.
The Inflation Reduction Act, P.L. 117-169 (IRA), established a new corporate alternative minimum tax (also known as the CAMT) based on financial statement income. The CAMT is a 15% minimum tax applied on adjusted C corporation financial statement income (AFSI).
The CAMT increases the taxpayer’s tax when the base erosion and anti-abuse tax (BEAT) and regular tax surpass the preliminary minimum tax.
A minimum tax credit is created when a taxpayer pays CAMT because the tentative minimum tax exceeds regular tax plus BEAT. This credit can be claimed against regular tax in subsequent years to the extent that regular tax exceeds CAMT plus BEAT, and it can be carried forward.
A new U.S. federal tax known as the “base erosion and anti-abuse tax” (BEAT) was established by P.L. 115-97.
It has targeted the erosion of the U.S. tax base by imposing the following:
There are some exceptions, as certain banks and securities dealers made certain base-eroding payments to related foreign persons during the tax year of 3% (2% for certain banks and securities dealers) or more of all their deductible expenses.
The BEAT is applied to the amount after most tax credits have been deducted. The taxpayer’s regular tax liability is less than 10% (or 5% in 2018) of their “modified taxable income.”
The CIT rates keep on from state to state, ranging from 1% to 12%.
It refers to the tax imposed on the finished goods and services. Value-added taxes and sales taxes are not allowed at the federal level. If your firm sells to clients in the United States, you must follow sales tax rules in the states where you meet registration requirements. These thresholds, tax rules, and the applicable rates vary by state and product, typically falling between 2.9% and 7.25%.
All goods imported into the United States are subject to U.S. Customs entry regulations and are duty-free depending on their categorization under the applicable product in the United States Harmonized Tariff Schedule.
Liability for payment of duty and other customs fees is established when an entry is filed with U.S. Customs and Border Protection (CBP). The person or legal entity on whose behalf the entry is made is responsible for paying the Importer of Record (IoR). However, the amount of duty payable may alter later if any of the information disclosed on entry is later shown to be inaccurate.
The federal and state governments levy excise taxes on various goods and activities, such as gasoline, kerosene, and diesel fuel, foreign insurance, ozone-depleting chemicals, and superfund taxes. Excise tax rates vary based on the goods and activities.
Stamp taxes are government-imposed taxes on legal documents related to the transfer of real estate or assets. Stamp taxes, often known as transfer taxes, are imposed by state and local governments when a real property transaction is formally recorded. The value of the real property being transferred often determines the tax.
Payroll tax refers to the taxes that employees and employers pay on earnings, tips, and salaries. Employees have taxes taken from their paychecks and paid to the government by their employer. These taxes include income taxes at the federal, state, and local levels.
Employers are normally responsible for a 6% federal unemployment tax (FUTA) on the first USD 7,000 in salaries paid to employees who meet specified criteria, with state unemployment taxes potentially reducing this amount by up to 5.4%.
For 2024, social security tax is levied on the first USD 168,600 in salaries received by employees.
Employers are obligated to withhold an equivalent amount of FICA taxes from employee pay, federal income tax at graded rates, and a 0.9% additional Medicare tax on wages over USD 200,000.
Furthermore, states may levy state income tax, state unemployment tax, workers’ compensation insurance tax, and other state-level benefit requirements at variable rates based on state legislation and the type of employees’ activities.
For 2024 and 2023, the federal supplemental withholding rates are 22% on supplemental income less than USD 1 million in the aggregate and 37% on supplemental income more than USD 1 million.
Local and state governments levy property taxes on real property, and most states charge a tax on company personal property.
The tax period is between January 1 and April 15 of each year when taxpayers prepare to report their taxable income for the previous year. U.S. corporation taxpayers are taxed on an annual basis. Corporate taxpayers may select a tax year other than the calendar year. New corporations may choose a short tax year for their first tax period and for changing tax years.
For filing taxes, the IRS allows different identification numbers to different taxpayers.
It is a 9-digit unique number assigned by the Social Security Administration to U.S. citizens, permanent residents, and temporary working residents. These numbers are commonly written as three fields separated by hyphens: XXX-XXX-XXXX. The three parts are:
The SSN is needed to secure legal employment in the U.S., receive social security benefits, and access certain government services.
It is a 9-digit number assigned by the Internal Revenue Service to non-residents and resident aliens, their spouses, and dependents who cannot get a Social Security Number. These numbers are written as 9XX-XXX-XXX (always start with the number “9”) and have a range of numbers from 50 to 65, 70 to 88, 90 to 92, and 94 to 99 for the fourth and fifth digits.
To apply for an Individual Taxpayer Identification Number, the applicant must fill out the W-7 form, along with another application form. This process ensures that the ITIN is issued to those who meet the eligibility requirements.
It is a 9-digit number issued by the Internal Revenue Service to the business entity. It is also known as a Federal Tax Identification Number. These numbers are written as XX-XXXXXXX.
Eligible applicants should fill out Form SS-4 (available on the IRS website) and should use it to report their capital gains and income for taxation purposes. The IRS offers it for free, and business entities must apply for an EIN by phone, fax, online, or mail before they begin operating.
It is a 9-digit number issued by the Internal Revenue Service to individuals who are legally adopting a child but cannot obtain an SSN to complete their tax return. It is a temporary number that expires after every two years, with certain exceptions.
The need for ATIN occurs when the child’s SSN is unknown or the child has never had an SSN. To apply for ATIN, use the W-7A tax form and provide below-mentioned information:
While applying, make sure that the individual is a U.S. citizen or resident child and that the adoption procedure is pending.
It is an 8-digit unique number issued by the Internal Revenue Service to paid tax return preparers. It was created to protect the privacy of tax preparers. All the enrolled agents ( the ones who assist or prepare the federal taxes for compensation ) must have a valid PTIN. You can get your PTIN by following the below-mentioned steps:
Once the fee payment is done, you will get the PTIN.
Hiring a professional tax accountant is optional, but if you have a tax accounting professional handling all your accounts, then handling the record is much easier. Tax accountants easily deal with confidential and complex data that is regulated by law.
There are different types of tax accountants based on the work industry or the client industry. Some of them are mentioned below:
If you are someone who needs tax services for a small business, it’s time for you to try out eBetterBooks for tax assistance.
eBetterBooks offer the most affordable plans and the best domain specialists to help you with all tax services, like generating accurate documents, adhering to IRS tax guidelines, classifying income and expenses, tracking tax credits, etc.
From tax planning to tax preparation, their dedicated professionals will provide you with tax consultation, online tax filing support, and VAT return submission.
eBetterBooks, the tax service provider will also assist you in detecting possible deductions or exemptions, conducting audits, developing future tax strategies, and presenting tax projections.
In order to handle your tax finances, there are different software available in the market. One of the well-known software is QuickBooks by Intuit. They offer both desktop and cloud-based accounting setups to the business. While handling the financial data, you may encounter some errors. The reasons behind this are:
eBetterBooks will assist you in resolving these errors and help you get a better understanding of your financial record.
Tax accounting is a useful accounting tool that helps companies understand their tax liability and avoid penalties. It helps both businesses and individuals declare their correct income and pay appropriate taxes while following GAAP regulations.
