There is a considerable and sizeable population of small business in the US economy. Statistically speaking there are over 28 million small business that occurs with small business specifically indicating businesses with fewer than 500 employees. Over 22, million individuals are self-employed without any additional payrolls or having employed other persons. Of the working population, a considerable percentage of over 50% that translates to 120 million individuals work in the small business (US statistics and data, 2016). Small business on average have modest turnovers that attract income taxes on the cash generated. Business entities are relevant in the generation of employment and incomes for households, thus huge contributors to the country’s GDP. Income standards are defined and regulated by the Financial Accounting Standards Board. The primary purpose of the Finance Body is the establishment and maintenance of Generally Accepted Accounting Principles (GAAP) in the United States.
The Internal Revenue service is the authority that is directly responsible for the collection of taxes and official administrator of the Internal Revenue Code. Income tax collection for small entities falls under the jurisdiction of the body. Income taxes are based on the revenue generated by business entities and vary from around 15%-39% (US statistics and data, 2016). The tax rates vary from state to state and rules governing the taxing laws are based on the definitions and concepts provided by the state and accounting authorities. Business entities are expected to file tax returns in accordance with the law as this is a tax obligation. The income tax is charged directly to the business as shareholders or owners are not directly taxed though their dividends are taxed.
When accounting for taxes, the tax levels are simply based on the incomes that are less allowable of expenses that are incurred in the generation of revenue. Tax structure for the entities does not necessarily have to include all accounts from the income statement to be considered as income tax. For instance, there may be taxes on the subsets of income statement items that may be inclusive of investment earnings through this will be inclusive of income tax as the net income concept is employed. In cases where the tax is withheld from the benefits of the business in the cases of the shareholders then this will entail the use of tax payables by the firm when the dividends are redistributed to the current shareholders. This tax, however, will not influence the effect of income taxes in the future that they are expected to pay. Income taxes withheld by the business can be reclaimed from the shareholders on the behalf of the owners either as constituents of refunds or reductions. Income taxes can be withheld from interests, dividends and royalties and their application. When income taxes are found out to be have been withheld as a means of withholding taxes, they are subject to the respective accounting requirements.
Deferred Tax Assets Expense.
Deferred tax liabilities and assets can either be classified as current or noncurrent, and this is based on the classification criteria that exists for the related assets and liabilities that are in consideration for financial reports. Tax assets and liabilities are sufficiently recognized to the amounts that can be entirely recognizable (Kaplan 2015). For tax assets, this is recognized once there is a realization and recognition of the extent to which it is probable. Liabilities, on the other hand, are measured by the tax rates that are enacted. The business tax expense can be considered as multiple tax rates with the income before tax. Tax policies provide the treatment options for revenues and expenditures. Differences that arise may either be permanent or temporary.
The items that appear as regular item include non-taxable profits and non-taxable expenses. Businesses employ the use of computing strategies in the extrapolation of tax costs that is as a consequence of the computation derived from deferred and current taxes payable through the utilization of the asset-liability method. Tax expenses can be more complicated to obtain due to the inclusion of various rates that apply to an array of income levels with the addition of the deductions and adjustments allowed by the relevant tax authorities. Temporary differences in the taxes computed are as a result of tax and accounting differentials and how they differ from one place to another. The tax expenses usually occur due to disagreements accustomed to payables, current tax expenses and the income before tax expenditure.
When the tax costs are more than the current tax that is due to be paid, then the computation usually results in deferred tax payables payments, but the instance that current tax payable supersedes the tax expense, then this is considered as deferred tax receivables (Kaplan 2015). For a business that is the form of computation that is expected to be undertaken and all deferred tax expenses are payable in the subsequent years. Deferred taxes usually presided over the years, and changes are expected in the intervening periods that may cause beneficial changes to the deferred taxes and may result in reversals.
Valuation Allowance.
For businesses in the computation of valuation allowances, this is considered as balance sheet items whereby the item can offset a considerable portion or the total value of the deferred tax assets (Cassell et. al 2015). This is held by the company as the firm may be of the opinion that it is not in a position to realize the full value of the property. This usually occurs upon the realization that the benefits that accrue from the deferred tax assets are not wholly realizable.
For instance, when a business entity record in its books of account a loss of $2 million it would necessitate the recording of the $2million decrease in deferred tax assets due to the decline of earnings. When the company establishes that it is not n expectatiom of profits in the subsequent periods, therefore, does not expect to earn back the $2million in the specified time before the expiration of the period. This follows that a recording of the same amount is done at full value due to the inability of the company to enjoy all the advantages of the tax benefit that may arise over a period.
The valuation allowance acts as a measure of last resort in the case scenario that business is unable to realize its deferred assets as the income expected from the future market may not cover the tax breaks. The valuation allowance depends heavily on the managerial assumptions of the business due to the level of decision making required in the determination whether the company may be able to utilize on the tax advantages. Future earnings are the main presumptions put forth by the management team on the expected future growth of the company and the profit margins expected. Deferred tax asset valuation allowances are essential in the credit allowance as they act as contra-asset account balances as they reduce the deferred tax assets to its realizable value. Increases accustomed to the valuation allowances usually lead to increases in the deferred income tax expenses. Continual changes in the contributions affect the income tax expenses.
Uncertainty in Income Taxes Positions.
The use of accounting for uncertainty in income tax positions usually changes the accounting principles and increases uncertainty in the reporting of tax risks. Diverse and new methods of accounting procedures have to be introduced to assist in dealing and provision of guidance when it comes to enterprise statements (Baker 2015). Interpretation of financial statements and tax positions has significant effects on the businesses especially in the disclosure of tax positions that remain uncertain. The uncertainty has resulted in misinformation in the declarations, and it is a mandatory requirement from financial regulators that reconciliation tables be used to check the unrecognized tax benefits from start and end periods. A businesses accounting and tax professionals inclusive of external experts are required in solving of companies uncertain tax positions.
There should be a well-organized plan that assigns responsibilities and checks that the business tax requirements are carried out to their entirety and usefulness. Policies and controls are the essential tools that uphold compliance with the required standards that are expected to be met (Robinson et. al 2013). Methods used in the accounting of general principals include the use of accounting for contingencies. This allowed for undisclosed items to be disclosed and accounted for once problems were established. Tax positions that are uncertain are taken care of through the Interpretation 48 that takes into consideration filed tax returns in the past or what is expected in future tax returns (Baker 2015). Such scenarios may result in reductions that may be permanent comprising of income taxes payable and in the deferral of income taxes that would have been payable in the immediate future. Deferred tax assets can also be realizable expected. Uncertainties in tax positions may relate in the following manner:
Where an enterprise decides against the filing of tax returns.
A difference in the allocation and changes in incomes amongst different jurisdictions.
Decisions that may result in the exclusion of earnings that are taxable in the tax return files. (municipal bonds that earn interest income)
Deciding that enterprise is tax exempt in the tax return file reports.
The internal control process is critical in income tax accounting, and avoidance of uncertain tax deductions as the internal checks have the procedures and processes that are expected from the company in the computation of the income tax positions. Internal controls involved should be thoroughly identified, ascertained and evaluated in the reporting of the tax positions of the company. Businesses that suffer from uncertain income tax positions should undertake procedural developments that will assist in achieving certain items that may include:
Tax positions that may be expected are adhered to and identified conclusively.
Recognized benchmarks for tax calculation purposes are met, and respective methods of accounting are deemed appropriate.
New information that may cause an effect on the tax positions of the company are evaluated in the proper manner and their tax benefit propositions are taken into account.
Any amounts that are not disclosed that relate to tax benefits and may be inclusive of penalties and interests are incorporated in the statements of financial position.
The uncertainty of tax positions should be dealt with by the business so as to ensure that the firm is not liable to tax deferrals and tax evasion due to the negligent or intentional use of different tax positions that are dishonest in accordance with the tax obligations of all businesses.
Financial Statement Disclosures.
Public financial statements have been used extensively in the expression of the financial positions held by the companies, and their roles have expanded to incorporate financial use by the general public. The financial statement is a prerequisite for information that one may need for business (Frank et. al 2009). This information revolves around the use of income statements, balance sheets, and the typical business environment while providing more insight into the company’s management actions that may cause significant change in financial statements.
Accounting principles are reflected in the financial disclosure, and this includes the use of taxation procedures (Frank et. al 2009). There should be proper disclosure of the taxed items and their respective tax areas that can be seen in the financial statements. Tax disclosures in the declarations are of great importance as it affects and indicates the health of the business. The disclosures are mostly used by buyers and lenders as the information is very critical for the evaluation of the targeted earnings that are to accrue from the company's activities and any hidden liabilities that may arise in the business.
The statements show the effective tax rate that is in use and provided by pre-tax incomes. Tax rates may either be high or low, and this does not necessarily translate to efficiencies or inefficiencies. Taxes in the financial statements are the material components of what is needed. There are massive alterations in tax that require the employment estimates and judgments that may at times obscure the use of financial statements. Disclosure helps us understand better the principles that provide more information on the income tax environment that the business operates. The business climate has continually changed with companies expected to disclose information that is relevant to the public while indicating the income tax profiles that the company follows.
Convergence with IFRS.
The globalization and adoption of international standards have led to calls for countries like the United States requiring them to reduce the gap that exists between International Financial Reporting Standards and the predominant U.S used Generally Accepted Accounting Principles. The merging of these two standards of accounting will affect the accounting field, and this may strongly affect the management, stock markets, professionals among other several stakeholders that are users of these principals. Convergence will also go a long way in changing the behavioral perceptions and attitudes of professionals as they look forward to the harmonization of the accounting standards.
Several impacts may be affected as a consequence of the convergence, and this will directly relate to the taxes (Larson et. al. 2004). Businesses may have to research tax laws that may affect the convergence with IFRS standards.
Tax issues may revolve around the tax rate that occurs in different countries and the legal form of operation that is mandated in the converged area (Haverty 2006). The after-tax profits that stand to be gained either as a consequence of reduced rate may also affect the core operations of a business entity. Tax financing and taxes on dividend procedures are instrumental in the decision-making process in cases of convergence. Tax laws that may change also include a significant fact that may be a matter of contention before a full understanding of the businesses.
In conclusion, the accounting, tax principles change affect business in one way or another as businesses have a moral and patriotic duty in the remittances of taxes to the relevant agencies. Business is affected as aforementioned above by the various aspects discussed in the paper. The effect of income tax can either exist as deferred tax and yearly income taxes. The convergence of taxes with IFRS would lead to considerable change based on the standards practiced by the IFRS. This would categorically mean that there is considerable change in the way taxes are meted out to businesses in the completion of duties. Businesses need to set internal control policies that can govern how business are governed and managed when it comes to accounting for taxes used by the enterprises.
References.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Cassell, C. A., Myers, L. A., & Seidel, T. A. (2015). Disclosure transparency about activity in valuation allowance and reserve accounts and accruals-based earnings management. Accounting, Organizations and Society, 46, 23-38.
Baker, S. R., Bloom, N., & Davis, S. J. (2015). Measuring economic policy uncertainty (No. w21633). National Bureau of Economic Research.
Robinson, L. A., & Schmidt, A. P. (2013). Firm and investor responses to uncertain tax benefit disclosure requirements. The Journal of the American Taxation Association, 35(2), 85-120.
Frank, M. M., Lynch, L. J., & Rego, S. O. (2009). Tax reporting aggressiveness and its relation to aggressive financial reporting. The Accounting Review, 84(2), 467-496.
Larson, R. K., & Street, D. L. (2004). Convergence with IFRS in an expanding Europe: progress and obstacles identified by large accounting firms’ survey. Journal of international accounting, auditing and taxation,13(2), 89-119.
Haverty, J. L. (2006). Are IFRS and US GAAP converging?: Some evidence from People's Republic of China companies listed on the New York Stock Exchange. Journal of International Accounting, Auditing and Taxation, 15(1), 48-71.
US statistics and data. (2016). Google.com. Retrieved 1 May 2016, from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjQsOqm07jMAhUJC8AKHXQFBlkQFggdMAA&url=https%3A%2F%2Fwww.usa.gov%2Fstatistics&usg=AFQjCNHlmHymaVVE05EsApi96Fe7ionVhw&sig2=fip7qcQ_WC7ESZhTrxfvng
