What it is:
Tax accounting focuses on the preparation, analysis and presentation of tax returns and tax payments.
How it works (Example):
For example, Company XYZ might use one accounting method for calculating depreciation when it reports financial results to investors, but tax laws may require it to use a different method for tax accounting purposes. As a result, Company XYZ might have one net income number on the financial statements filed with the SEC and a different net income number filed with the IRS.
Why it Matters:
Although tax accounting largely follows generally accepted accounting principles (GAAP), in a few ways it is quite different. This is why you might hear analysts discussing the difference between "book and tax," meaning the differences between and tax accounting. Tax accounting takes special training and education, which is why some accountants specialize only in taxes.