Unit 9

TAX ACCOUNTING

Overview

In this unit, students will be learned about tax accounting and the difference between
financial accounting and tax accounting.

Learning objectives
After this unit, students should be able to:
>> Understand the importance of tax accounting
>> Differentiate between tax accounting and financial accounting

Think and discuss

1. What is tax accounting?
2. Do you agree or disagree with this statement: “A good tax accountant must have a
thorough knowledge of the tax code of his or her country”? Why or why not?

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 1. S
1. SPECIAL TERMS
Match the words or expressions in column A with their definition in column B.
You can look it up for more detailed explanations in the specialist dictionary.
Column A Column B
A. the divisions based on income that are
1. tax accounting each taxpayer is required to pay a different
rate of tax
2. tax bracket B. the amount to which a tax is imposed
C. calculating an individual’s or a company’s
3. tax base
liabilities for tax
D. the payment owed by an individual, a
4. tax-exempt business, or other entity to a federal, state, or
local tax authority
E. how much a tax is paid on a certain
5. taxpayer
amount of tax base
F. a set of laws that governs taxation in a
6. tax code (US)
given jurisdiction
G. the difference between the tax expense
7. tax liability and tax payable caused by an item that does
not reverse over time
H. the one who legally has to declare and pay
8. tax rate
taxes
I. the difference between pretax book income
9. permanent difference and taxable income that will eventually
reverse itself or be eliminated
J. when you don’t have to pay tax on certain
10. temporary difference
income

2. READING

READING 1

Reading text 1: Tax accounting and do exercise 2.1 below

TAX ACCOUNTING
Almost all individuals and organizations in the United States are required to
compute their tax liability, complete the necessary forms, and pay the taxes due. Many
features of the American system, both in the imposition and collection of taxes, have been

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adopted by other countries. The speciality of tax accounting has, therefore, developed into
one of the most important branches of accounting throughout the world.
Income taxes are a major concern for businesses as well as individual citizens.
Unfortunately, businessmen themselves often do not understand the tax laws, and they
must therefore depend on the advice of tax accountants and lawyers. A tax accountant must
have a thorough knowledge of the tax code of his or her country and of any divisions within
it that have the power to levy or impose taxes. In the United States, federal tax laws are
extremely complex. In addition, many income tax laws in almost all states differ from the
federal regulations. Some local governments - New York City, for example- also levy
income taxes that have their own unique features.
Careful planning designed to decrease the tax liability to the lowest level is thus a
major concern of business. This planning is made possible by various provisions in the tax
laws that offer alternative methods for handling particular transactions or accounting
procedures. One alternative may thus have a significant tax advantage over another,
resulting in either a tax saving or a postponement of the tax liability. A business can pay
substantially more taxes than necessary if the wrong financial decision is made. Among
these potentially significant decisions might be included the form under which to organize,
whether or not to set up multiple corporations, and which accounting methods should be
used to deal with inven depreciation.
For tax as well as accounting purposes, there are three major forms of business
organization, the individual proprietorship, the partnership, and the corporation. Tax laws
vary considerably for each of these; the major difference, however, is between the
corporate form and the other two. There are also nontax features that must be evaluated in
choosing a form of organization. Among these are limited liability, continuity of existence,
and the case of raising capital. The owners are usually not liable, or personally responsible
for the actions of a corporation, since the corporation enjoys legal status as an individual
entity. The corporate structure also permits the company to continue to exist regardless of
changes in ownership and management. Corporations can also raise capital by selling
shares, known as "stock," in the ownership of the company.
In the case of both the individual proprietorship and partnership forms of business,
income is taxed on the individual proprietors or partners. The owners of these businesses,
therefore, pay the progressive income tax rate for individuals on their business income. A
progressive income tax is one that charges a higher rate for higher earnings. An individual
who earns $25,000 a year pays a higher percentage of his income in taxes than one who
earns only $10.000.
Corporations, on the other hand, are subject to a tax on their profits while the
stockholders of a corporation are also taxed at their individual rates on the dividends they
receive from these profits. Dividends are sums of money paid to the owners, or, in other
words, people who own the company out of the corporation's earnings. The corporation is

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not allowed a deduction for the dividends it pays out when its taxable income is computed.
This results in double taxation of the corporation’s income. In certain cases, the double tax
is eliminated or reduced under special provisions.
(Source: Bich Van & Trong Thuy, 2001, The Language of Accounting in English,
Hanoi: Thong Ke Publisher)

2.1 Answer the following questions

1. Why has tax accounting become an important speciality throughout the world?
2. Why do most businessmen depend on tax accountants?
3. What does a tax accountant have to know?
4. What is a major concern of business?
5. How is tax planning made possible?
6. What are the three major forms of business organization?
7. How are the owners of individual proprietorships and partnerships taxed?
8. What is a progressive income tax rate? Give an example.
9. To what income tax are corporations and their owners subjects?
10. How can these result in double taxation?

READING 2

Reading text 2: Permanent differences in tax accounting and do exercise 2.2 below
PERMANENT DIFFERENCES IN TAX ACCOUNTING
In the U.S. and Britain, accounting methods for income tax and financial reporting
are independent of each other. This means that there can be large differences between the
profit recorded in the financial statements and the profit for the income tax calculation. The
difference in accounting for taxes between financial statements and tax returns creates a
permanent and temporary difference in tax expenses on the income statement.
A temporary difference eventually smoothes itself out over time, but permanent
differences won't ever be the same in terms of book versus tax. A permanent difference is
an accounting transaction that the company reports for book purposes but that it can't (and
never will be able to) report for tax purposes.
Permanent differences arise because GAAP allows reporting for a particular
transaction but the IRC (Internal Revenue Code) does not. As with temporary differences,
quite a few accounting events lead to a permanent difference.
Five common permanent differences are penalties and fines, meals and
entertainment, life insurance proceeds, interest on municipal bonds, and the special
dividends received deduction.

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 Penalties and fines. These expenses occur when a business breaks civil, criminal,
or statutory law (and gets caught!). Say that a company breaks a local zoning ordinance or
an employee gets a speeding ticket while driving the company car to conduct company
business.
The company deducts any fines assessed against book income, but IRC disallows a
penalty or fine expense for tax purposes. The company never gets to reduce taxable income
for the expense, thus creating a permanent difference between net and taxable income.
 Meals and entertainment. Companies can expense $100 for the cost of providing
business-related meals and entertainment that they incur in the normal course of business
for book purposes. However, under IRC, for tax purposes, the business can expense, at
most, only 50 percent of that same cost, unless certain exceptions apply. In taxes, as in life,
there's no free lunch.
 Life insurance proceeds. If a corporation receives life insurance upon the death of
an employee, it's income for financial accounting but never taxable income. As for the
premiums paid for the life insurance on key employees, the company can expense them for
book but not tax purposes.
 Interest in municipal bonds. Municipal bonds are debt instruments that a local
government issues to fund a project, such as a new highway. Under GAAP, you add this
income to net income. For federal tax purposes, it's generally never taxed (although this
may not be true in some states). Likewise, any expenses incurred in obtaining tax-exempt
income are deductible for book but not tax purposes.
 Special dividend received deduction. Dividends a company receives from other
businesses in which they have ownership are taxable at less than 100 percent, depending
on the amount of ownership. For financial accounting purposes, you include all dividends
a company receives as income.
For the dividend received deduction, if the company has less than 20 percent
ownership in the other business, the company deducts 70 percent. For example, if the
dividend is $100, the company reports only $30 as income.
For 20 to 80 percent ownership, the business deducts 80 percent of the dividend.
For more than 80 percent of the ownership, the company doesn't report any of the dividends
as taxable income.
(Source: http://www.dummies.com By Maire Loughran)

2.2 Answer the following questions

1. What is a permanent difference?

2. Why do permanent differences arise?
3. How many common permanent differences are there? What are they?
4. When do Penalties and fines occur?

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 5. What do Penalties and fines represent?
6. How much can companies expense to provide business-related meals and
entertainment that they incur in the normal course of business for book purposes?
7. What happens if a corporation receives life insurance upon the death of an
employee?
8. What are municipal bonds?
9. How are dividends a company receives from other businesses in which they have
ownership taxed?
10. How are dividend received deduction taxed?

3. LISTENING

3.1 You are going to listen to a conservation between an accountant and a

CEO. An accountant explains the taxation expenses disclosure requirements
to a CEO. Listen carefully and fill in the gaps.

3.2 We've got a few minutes to ourselves. Could you just go over it again?
CEO:
How is the taxation (1) ………. calculated?
Accountant: OK. The operating profit (2) ………. our interest expenses gives us
the profit before tax (3) ………. This is the amount which theoretically is then
subject to taxation. In fact, the taxation amount is just an (4) ………., because we
won't know until much later exactly how much tax we'll have to pay.
CEO: What do we do with this estimate?
Accountant: In effect, we prepare an (5) ………. tax return. It won't be filed, just
kept by us to justify the taxation expense we include in the P&L.
CEO: Will this also be audited?
Accountant: Yes. And of course, the profit after tax is the figure which we can (6)
………. to shareholders.
CEO: What do we do when the taxable income differs from the profit before tax?
(7)
Accountant: We record what happens on the balance sheet. It’s either a net
………. tax asset or (8) ………..

Listen again and answer the question.

1. How does the accountant calculate the profit before tax figure?
2. Why is the taxation amount only an estimate?
3. Do they file the interim tax return?

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4. VOCABULARY EXERCISES

4.1 Complete the sentences with correct words or phrase

abolish bracket breaks exempt

exile increase property return

1. The government needs more money, so it is planning to ………. taxes.

2. He earns a lot of money. He must be in the highest tax.
3. She lives there because she has to. She's a tax ……….
4. They are planning to ………. the tax on large company cars, and replace it with
a tax on all company cars.
5. She is a student, so she is a tax ……….
6. The government is planning to introduce a new tax ………. for IT companies.
7. Don’t buy a house this year. The ………. taxes are being abolished next March.
8. A tax ………. is the same as a tax declaration. It's a list of income and tax-
deductible expenditures for the tax authority.

4.2 Complete the paragraph with the corret words from the box. You will
not use all the words

profit advantage payments purposes

deduction tax payer assets earnings
preferential sales stockholders taxes

A tax advantage also exists for businesses that sell merchandise for personal use.
(1)
These …………… are often made on the installment basis, with payments spread over
a period of weeks, months, perhaps even years. For tax (2) ……………, it is permissible to
report the profit from sales during the years in which the actual payments are made rather
than during the year of the original sale. A tax (3) …………… is also available to the holders
of most depletive assets. The (4) …………… who owns assets of this kind is allowed a
deduction on the gross income derived from the asset. The (5) …………… is known as a
depletion allowance; because of the economic importance of many of the depletive assets,
the percentages allowed to the taxpayers are of great political concern. Some corporations
received such a tax advantage that despite substantial (6) ……………, they were paying
almost no (7) …………… In an effort to reduce the inequities created by this (8) ……………
tax treatment, the U.S. Government recently instituted an additional 15 percent tax on tax
preference.

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 4.3 Match each definition on the right with a term from the box.
1. capital gains tax
2. value-added tax
3. corporation tax
4. excise duty
5. loophole
6. progressive tax
7. tax - deductable
8. tax evasion
9. income tax
10. to abolish tax

a. People pay this tax on the money they earn.

b. Companies pay this tax on their profits.
c. Profits from the sale of assets may be subject to this tax.
d. Governments tax things such as cigarettes, alcohol, and petrol.
e. This kind of tax means that the more money you earn, the higher the rate of tax you
have to pay.
f. A mistake in the law that allows people to avoid paying tax.
g. This tax is added to the price of goods and services.
h. Avoid paying tax by giving false information to the authorities.
i. to cancel a tax
j. These payments are not subject to tax.

4.4 Complete the following paragraph with the correct form of the word in
parentheses.
1…2…3…4…5…6…7…8…9…10…
While the small-business (1) …………… (CORPORATE) can save a great deal in
taxes by being taxed as a partnership, it keeps the other nontax advantages, such as limited
liability.
Other income-tax (2) …………… (ADVANTAGE) often encourage the corporate
form of organization. One of these is the possibility of selling the business or liquidating
it; that is, of going out of business and disposing of the assets. When this occurs, it is
possible to obtain long-term capital gains (3) …………… (TREAT). A long-term capital

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gain is a profit on the sale of a capital asset that has been owned for a (4) ……………
(SPECIFIC) period. Long-term capital gains get preferential tax treatment-that is, half the
rate applied to other kinds of income. Short-term gains-held for less than a specified period-
are (5) …………… (TAX) as ordinary income. A second possible tax advantage of the
corporate structure is the deferral or postponement of double (6) …………… (TAX) by
simply not paying (7) …………… (DIVIDE). A third is the flexibility that comes from
being able to time the distribution earnings so that they occur during the years in which the
owners have the lowest tax (8) …………… (LIABLE).

4.5 Correct the wrong expressions (compound nouns) in the following

sentences.

1. The economic year is a period of twelve months arbitrarily chosen for tax purposes.
2. Accounting laws are a dozen or so concepts, conventions or doctrines generally
observed in accounting.
3. In a tax statement, you give information about what you earn every year.
4. Your tax credit is the total amount of income on which you do not have to pay tax.
5. A personnel allowance is an amount of money that you can earn before you are taxed.
6. In Britain, national welfare is a system in which the money collected is given to
people who are too old or ill to work.
7. In Britain and New Zealand, the Inland Office is the government office that
collects the main taxes.
8. Inheritance duty is paid from the money you have received from someone who
has died.
9. Direct tax is charged on goods and services rather than on the money that people earn.
10. Income duty is paid in relation to how much you earn.

5. SPEAKING

5.1 Individual work

Based on the information in the two texts above, answer the following
questions with your own words
1. What is tax accounting?
2. What is a permanent difference?
3. What are five common permanent differences between tax accounting and
financial accounting?

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 5.2 Pair work or group work
Work with your partner(s) and discuss your answers.

6. WRITING

6.1 Rearrange the following words to make complete sentences

1. must/a tax/accountant/have/knowledge/a through/of/the tax code/his/or/of/her

country.
………………………………………………………………………………………
2. the owners/dividends/are/of/sums/money/to/paid/out of/the corporation’s
earnings/.
………………………………………………………………………………………
3. a progressive/is/income tax/one/charges/a higher/that/rate/for/higher/earnings/.
………………………………………………………………………………………
4. a/income taxes/concern/are/major/businesses/as well/to/individual citizens/.
………………………………………………………………………………………
5. pay/a business/can/substantially/more taxes/necessary/than/if/the
wrong/financial/made/decision/is/.
………………………………………………………………………………………

6.2 Complete the following sentences using the given words.

1. Almost/all individual/and/organization/the United States/ required/ compute/
tax/liability/and/pay/the taxes due.
………………………………………………………………………………………
……………………………………………………………………………………………...
2. The speciality/ tax accounting/has/develop/one/most important/ branches/
accounting/throughout/world.
………………………………………………………………………………………
……………………………………………………………………………………………...
3. Unfortunately, /businessmen/often/not/understand/the tax laws/and/they/must
depend/the advice/tax accountants/lawyers.
………………………………………………………………………………………
……………………………………………………………………………………………...
4. Careful/planning/designed/decrease/the tax/liability/the lowest/level/a major/
concern/business.

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 ………………………………………………………………………………………
……………………………………………………………………………………………...
5. Corporations/can/also/raise/capital/selling/shares/known as/stock/the ownership/
the company.
………………………………………………………………………………………
……………………………………………………………………………………………...

6.3 Translate the following sentences into Vietnamese

1. You can claim your spouse as a dependent on your tax return if he or she doesn’t
earn an income.
………………………………………………………………………………………
……………………………………………………………………………………………...
2. Almost all individuals and organizations are required to compute their tax ability,
complete the necessary forms and pay the tax dues.
………………………………………………………………………………………
……………………………………………………………………………………………...
3. Tax accounting is the subsector of accounting that deals with the preparations of
tax returns and tax payments.
………………………………………………………………………………………
……………………………………………………………………………………………...
4. Tax accounting may result in the generation of a taxable income figure that
varies from the income figure reported on an entity's income statement.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. A permanent difference will never be reversed, and as such, will only have an
impact in the period it occurs. A temporary difference, however, creates a more complex
effect on a company’s accounting.

6.4 Translate the following sentences into English

1. Lập kế hoạch thuế cẩn thận nhằm giảm nghĩa vụ thuế xuống mức thấp nhất là
một trong các mối quan tâm lớn của các doanh nghiệp.
………………………………………………………………………………………
……………………………………………………………………………………………..
2. Hầu hết tất cả các cá nhân và doanh nghiệp đều phải có trách nhiệm nắm được
nghĩa vụ thuế của họ, hoàn thành các biểu mẫu cần thiết và thanh toán các khoản thuế đến hạn.
………………………………………………………………………………………

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……………………………………………………………………………………………..
3. Sự khác biệt giữa quy định của kế toán và quy định của luật thuế tại các quốc gia
trong việc ghi nhận một số giao dịch nhất định đã tạo ra sự chênh lệch giữa lợi nhuận kế
toán và thu nhập tính thuế của các doanh nghiệp.
………………………………………………………………………………………
……………………………………………………………………………………………..
4. Các ví dụ của chênh lệch vĩnh viễn giữa kế toán và quy định của luật thuế là tiền
phạt vi phạm hợp đồng kinh tế, chi phí quảng cáo vượt mức, chi phí không có chứng từ
hóa đơn hợp pháp.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. Một trong các trách nhiệm cơ bản của nhân viên kế toán thuế là kiểm tra chứng
từ và lập báo cáo tổng hợp thuế hàng tháng.
………………………………………………………………………………………
……………………………………………………………………………………………...

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