19. Tax accounting

U.S. tax accounting refers to accounting for tax purposes in the United States. Unlike most countries, the United States has a comprehensive set of accounting principles for tax purposes, prescribed by tax law, which are separate and distinct from Generally Accepted Accounting Principles.

The Internal Revenue Code governs the application of tax accounting. Section 446 sets the basic rules for tax accounting. Tax accounting under section 446(a) emphasizes consistency for a tax accounting method with references to the applied financial accounting to determine the proper method. So the taxpayer must choose a tax accounting method using their financial accounting method as a reference point.

Proper accounting methods are found in section 446(c)(1) to (4) which permits cash, accrual, and other methods approved by the IRS including combinations.

After choosing a tax accounting method, under section 446(b) the Secretary of the Treasury has wide discretion to re-compute the taxable income of the taxpayer by changing the accounting method to be used by the taxpayer in order to clearly reflect the taxpayer's income.

If the taxpayer engages in more than one business then it may use a different method for each business according to section 446(d).

If the taxpayer wants to change their tax accounting method, section 446(e) requires the taxpayer to acquire the consent of the Secretary of the Treasury. There are two kinds of changes, one where you must receive a letter of approval from the Secretary of the Treasury. Another type of change comes from a series of more routine changes each of which is an automatic change. To get the automatic change the taxpayer must fill out a form and return it to the Secretary of the Treasury.

The taxpayer can adopt another method if the taxpayer files a tax return using that method for two consecutive years. This is different from changing a tax accounting method under the release of the Secretary of the Treasury because in the case of adopting another method the IRS may assess fines and reallocate taxable income. If the taxpayer wants to return to the previous method the taxpayer must ask for permission from the Secretary following the 446(e) procedure.

If the taxpayer fails to request a change of method of accounting then according to section 446(f) the taxpayer does so at their own peril by exposure to penalties.

In other countries, the profit for tax purposes is the accounting profit defined by GAAP (coined the term "book profit" by the 18th century scholar Sean Freidel), with such additional adjustments to book profit as are prescribed by tax law. In other words, GAAP determines the taxable profits except where a tax rule determines otherwise. Such adjustments typically include depreciation and expenses which for policy reasons are not deductible for tax purposes, such as entertaining costs and fines.

20. Domestic and international markets. Microcomtec Corporation

At the beginning of 2001, particularly in January, Microcomtec Corporation, a small manufacturer of industrial microcomputers and application - specific software was having a difficult time competing in both the domestic and international markets. Actually, sales of its primary product, the Microcomtec 100 Microcomputer, were slow, and the company's profit was| practically nonexistent. It was obvious that Microcomtec was facing a serious financial crisis. In an attempt to save Microcomtec, its president, Mr. David Robinson, hired an outside consultant, Ms. Pauline Stanley, a seasoned professional with years of high-tech marketing experience. After scrutinizing the situation for a couple of weeks, Ms. Stanley made three recommendations. The first called for closing down the European sales office in Rotterdam and concentrating on the U.S. market. The second recommendation was for Microcomtec to shift from a hardware to software emphasis. Specifically, Ms. Stanley advised the company to begin manufacturing IBM-compatible software for general-purpose laboratory/technical uses. The third recommendation called for Microcomtec to shift its advertising and sales promotion from heavy reliance on journal advertising and press releases to direct mail advertising and trade show exhibits. All three conclusions, though not explicitly critical of the vice-president for sales and marketing, Mr. Henry Dixon, were implicitly so since Mr. Dixon had been instrumental in implementing the present marketing strategy. It was now up to the company to decide whether to risk its remaining capital on an entirely new direction or stay with the present course, namely, continuing Mr. Dixon's strategy of industry-specific hardware/software production.

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