Jim’s Pizza Shop: Tax Accounting, Research Paper Example

Tax accounting is a method of accounting that deals with tax issues. It includes activities that involve future planning of tax responsibilities. This aspect of accounting is different from public financial statements accounting. It is governed by internal revenue codes that provide guidelines for individuals and companies to follow when calculating their tax on their returns (http://0taxandaccounting.bna.com.maurice.bgsu.edu/btac/T200/split_display.adp?fedfid=15853968&vname=tmusporac&fcn=1&wsn=501669760&fn=15853968&split=0). It contains principles that differ from the generally accepted accounting principles. This paper is going to discuss the case involving tax accounting from house property income.

The case study provided involves individual tax accounting. Mr. Mark should calculate his monthly properly his returns from the property so that he can pay the right amount of tax that corresponds to his revenue. Jim the lessee requests Mr Mark to rewire his building to enable him use specialized equipment for his business. The rewiring will cost $50000. Mark asks Jim to pay the wiring cost and in return he forgoes $20000 one month’s income. In this scenario Jim’s request to rewire the building for the specialized equipment does not increase the value of the building. This is because the wiring only serves the specialized equipment. This means that Mr. Mark will incur some extra expenses for accepting to rewire the building which directly affects his gross monthly income from the property. If he pays tax basing on the previous month’s returns, he will pay tax that does not correspond to his income. Thus, a proper means of tax accounting must be performed on new returns. Because Jim agreed to pay $ 50000 for rewiring Mark has nothing to do with this amount because it does not affect his returns. On his gross income, he should include the full amount of his income excluding $20000 which he forgoes for the sake of Jim’s acceptance to pay for the wiring. The reason why he excludes $20000 from the taxable income is because the amount becomes an expense (Blair, 2004).

Tax accounting involving house property incomes has standard deductions that are considered when calculating tax payable. They include standard deductions such as repair and collection charges. During deduction30% of the total deductions are subtracted from the net annual value. Other deductions include interest on borrowed capital and fresh loans that have been raised to repay the original loan. However, there are other amounts that are not deductable or except from tax accounting. Examples include electricity, water, salary of watchman, and ground rent expenses. These expenses are not deducted as expenditure against the income from the house property during tax accounting. In the case provided, the amount to be incurred in rewiring the house is an expense that affects the income from the house property but it is not expenditure against income from the house. Therefore, the amount is not exempt from gross income (Basile et.al, 2008).

According to U.S. Income Portfolios, gross income plays an important role as tax liability is being determined. The items that constitute gross income have implications of escalating the taxable income by an amount that is equivalent to the items. On a similar note, any item that is excluded from the gross income has no effects in increasing the tax liability (http://0 taxandaccounting.bna.com.maurice.bgsu.edu/btac/).

Conclusion

In conclusion, mark should include the forgone $20000 rent payable by Jim on the gross income. He should then consider the amount for rewiring as an expense that affects the income from the building. These expenses will be considered non-deductable because it does not improve the value of the house. Basic accounting processes can help mark calculate the amount that is appropriate for tax payment from his income. Tax accounting is different from traditional accounting that encompasses all financial transactions of an individual or company. Its major focus is on tax and how individuals arrange and pay their taxes to avoid penalties.

References

U.S. Income Portfolios available at http://0-taxandaccounting.bna.com.maurice.bgsu.edu/btac/ accessed on 13th October 2012.

U.S. Income Portfolios available at http://0-taxandaccounting.bna.com.maurice.bgsu.edu/btac/T200/split_display.adp?fedfid=15853968&vname=tmusporac&fcn=1&wsn=501669760&fn=15853968&split=0 accessed on 13th October 2012.

Basile, A., R. Katz, N. D. Katz & Finkelstein, H. (2008). New Preparer Penalties. The CPA Journal (July): 40-45.

Blair, L. (2004). An Estimated Tax Payment Scheme. Journal of Forensic Accounting, (5): 511 514.