Tax accounting and risk advisory services can be applied to anyone: individuals, businesses, and corporations. Regardless of that category you fall under and your financial goals, understanding taxes and the risks associated with investments is crucial toward greater financial success. While tax accounting and risk advisory are separate entities, they work in conjunction to provide clients with an effective understanding of how to better manage their finances. Building awareness around these two areas of finance can provide your personal and business goals with a targetable action-plan toward managing your finances.
What Is Tax Accounting
Tax accounting follows the Internal Revenue Code, which basically covers the rules individuals and companies must abide by when preparing taxes. Under Section 446(a), accountants are required to maintain a consistent method for the tax preparation that uses the taxpayer’s financial accounting method as a form of reference. It is also important to note that tax accounting does differ slightly based on if you are represented as an individual or a business.
Tax Accounting For Individuals vs. Businesses
Individual taxpayers generally focus on anything that could cause a tax burden (i.e. an individual’s income, their gains & losses from investments, and other taxable transactions). On the other hand, tax accounting for businesses can get a little more complex. Businesses must account for their earnings just like an individual would, but they also must calculate other funds such as business expenses and funds allocated for shareholders in order to decipher the business’s total financial picture that is taxable.
The basics of tax accounting for individuals and businesses include an understanding of the finances within the current year as well as future years. Based on the current year, accountants must be able to determine both tax liabilities and tax assets, which are based on the estimated amount of taxes payable or refundable. Moreover, accounting for future years can be accomplished by determining deferred tax liabilities and tax assets by taking into consideration potential tax losses or tax credits, which can reduce an organization’s future tax liability.
Risk advisory, or risk management, includes the analysis and mitigation of uncertainties associated with investment decisions. Beyond investments, risk advisory can take the form of management consultancy, taxation risk assessment, and auditing. It is crucial for individuals and businesses to understand the risks they may come across in all facets of their finances.
Risk advisors must follow a plan for identifying what could put an individual’s or a business’s finances at risk. Advisors typically follow a 5 step methodology for performing their due diligence on assessing risk:
- Identify potential threats
- Assess how vulnerable you could be toward those threats
- Determine how likely the risk could happen and how impactful the risk could be
- Identify strategies for mitigation
- Pinpoint solutions for eliminating and/or minimizing the risk
No matter if you are investing in stocks, bonds, or mutual funds, there will always be some risk and can be quantified both absolutely and relatively. Successful advisors find a balance in their assessments in an effort to find the best financial solutions for clients based on their goals and current financial standing.
What Are The Roles Of A Tax Accountant vs. A Risk Advisor
As the name implies, tax accountants prioritize tax-based analysis, which contrasts slightly to a traditional accountant who gleans a client’s overall financial statement and position. Tax accountants are obligated to ensure clients follow the tax laws issued by the Internal Revenue Code in order to avoid any penalties from the government. Additionally, tax accountants serve to reduce the amount of taxes an entity may have to pay. The advice shared differs based on the field of service. For example, individuals seeking help on their retirement plan will not receive the same advice as an individual looking to start their own business. A tax accountant adjusts their strategies of assistance based on the client in order to ensure the taxpayers comply with federal, state, and local tax laws.
Though ‘risk’ typically has a negative connotation, in the finance industry it is an essential topic that can’t go unaddressed. Risk advisors are tasked with identifying risk and providing solutions to either minimize the risk, or eliminate it entirely if possible. More times than not, risk is unavoidable, so risk advisors take it upon themselves to measure the magnitude of potential threats and provide services to neutralize their impact. This can be accomplished through acknowledging the behavioral side of finances as well as understanding the differences between passive and active risk management. Risk advisors can gauge the impact an investment will have based on changes to market sentiments. Additionally, combining both passive and active risk assessments can account for any deviations your investments are likely to incur. The market fluctuates, and your investments will likely fluctuate too based on factors inside and outside of the market. Accordingly, risk advisors measure potential drawdowns and other factors unrelated to the market in order to accurately account for potential threats to a client’s investment.
When it comes to tax accounting and risk advisory services, the two provide independent forms of assistance for clients. With that said, tax laws and guidelines are ever-changing so many individuals and businesses are forced to keep up with these changes in order to avoid being unnecessarily penalized. Tax accounting and risk advisory can share a common goal in satisfying a client’s need for tax preparation and minimization of risk.
Based on a company’s deferred tax liabilities and tax assets, tax accountants and risk advisors can combine forces in order to ensure each nuance between GAAP accounting and tax accounting laws are being met. Businesses benefit from this because, for example, if they have a tax asset with a less than 50% probability of receiving some portion of the asset, they can be advised to go in another direction. Additionally, during an acquisition, a business must abide by certain GAAP laws for adjusting their assets and liabilities, which differs from any pricing adjustments you would find from tax accounting regulations. Combining both the tax accounting principles with risk advisory can mitigate potential problems an individual or business may experience when accommodating GAAP and tax accounting laws.
In close, though tax accounting and risk advisory provide different forms of service, they also work hand-in-hand in order to ensure laws are met and risk is accounted for. It is absolutely essential as an individual and a business to understand the various tax laws and be able to gauge any risk in and outside of their investments.