Tax is always a energy consuming all the time. It is not only because tax includes a part of your income, but it also includes the GAAP on your accounting. Now, you need to understand the difference and how this works for your small business. You may have professional accountants working for you for this matter but you still need appropriate understanding on the field so you can monitor it. Tax is basically an amount of money you should contribute to your country. The amount will depend on many things including your GAAP calculation. So what is GAAP actually?
- In business, we know about accounting on tax basis. It basically sets your taxable income. It defines how much money you earn and how much you should send to the government.
- Now, on the accounting you will know GAAP that works on entitles comparability. From time to time, we will have the revenue, and GAAP defines the revenue as money you earn. If you will receive any payment in front, you cannot receive it as income until you really earn the money. That is how GAAP works. It explains that before we make any tax returns, we will need to make sure our accountants worked with the GAAP.
- GAAP and tax also work differently in a matter of applied depression method. Tax will use specific accounting method with accelerated and also modified cost for the recovery system. This will end up on different amount of money and digits. On the other way, GAAP defines the depreciation method using several other common methods like activities, digits sum, balance declining, and also straight line. However, IRS makes it possible for us to make an expense on fixed assets on certain amount just in the same year of purchasing.
In business, you may also find several things like bad debt allowance, inventory, and also goodwill treatment. Those tree things have different stories in GAAP and tax. In GAAP, we are allowed to make a record on the expense. This record will work for the bad debt allowance.
- However, goodwill amortization is not allowed here. Meanwhile, tax will give different treatment.
- When the debt is actually written off, your bad debt expense is allowed.
- And of course, goodwill amortization is allowed here for specific period.
- Inventory is treated the same way, and inventory valuation allowance is offered.
Now, you know the different and this will make a good start to do it.