Tax Law & Accounting Paper

Tax Law and Accounting

Sue Abraham

University of Phoenix

Tax Law and Accounting

The word “tax” did not become a household name until the late 1800’s when congress created the nation’s first income tax law. Prior to this law the government used tariff’s and imported goods to help support the economy. However, in order to bring in more revenue to help cover the costs of the civil war the government had to make necessary reforms and re-establish tax law. The Revenue Act of 1862 (July 1, 1862, Ch 119, 12 Stat. 432), signed into law by President Abraham Lincoln, is the stepping stone to the modern income tax statutes of today. It is based on “principles of graduated, or progressive, taxation and of withholding income at the source” (History of the Income Tax in the United States, 2000, ¶2). During this time the government collected over 300 million dollars, the highest in the nation’s history.

It was not until 1913 that income tax became a part of the United States Constitution under the 16th Amendment. This statute became known as the Revenue Act of 1913 (October 3, 1916, Ch 16, 38 Stat. 116). Congress was allowed to tax income on individuals and corporations and within ten years the internal revenue collected over $5.4 billion dollars (et al., 2000, ¶5). Since then there have been several tax reform acts implemented to help reduce the tax burden on individuals and reduce the tax rate. President Ronald Reagan imposed one of the largest tax reductions in history with the Tax Reform Act of 1986 (October 22, 1986, Pub.L. 99-514,100 Stat. 2085). This tax reform lowered the income tax from 50% to 28%. The Revenue Reconciliation Act of 1993 (August 10, 1993, Pub.L. 103-66,107 Stat. 312) was signed into law by President Bill Clinton to help reduce the federal deficit.

Although income tax is the one of the most effective ways of raising revenue for the government it is also one of the most controversial. It appears no matter how many tax reforms Congress passes it still has a negative impact on the economy. The President formed the President’s Advisory Panel on Tax Reform in 2005 to discuss new ideas for income tax reforms. The efforts to raise revenue for the government and create a sound economy will probably continue to be an uphill battle for many years to come.

Tax accounting is used for calculating taxable income for a period defined by the income tax law while Generally Accepted Accounting Principles (GAAP) is the concept of matching revenues with expenses. These expenses are then presented to the stakeholders of an organization which informs them of the financial position of the company. Tax accounting falls under the laws of the Internal Revenue Service and is responsive only to changes in the income tax law. GAAP follows the guidelines of the U.S. Securities and Exchange Commission (SEC) and is responsive to market changes and creating uniformity in accounting methods for financial statements.

The major differences in tax accounting and GAAP are revenue recognition and the matching principle. For example, revenue recognition for lease fees collected in advance would be recorded when the income is earned under GAAP, yet in tax accounting the collection of the lease payment would be considered taxable income. Furthermore, under the matching principle for fixed assets GAAP allows multiple depreciation methods while MACRS is the only method used for depreciation under tax code law. Tax accounting relates to taxable