Structuring tax heads in the Chart of Accounts (COA)

Find out interesting insights with John Silverstein, VP of FP&A, XR Extreme Reach

Moderated by Sherry, Financial Technology Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Sherry: Hello, and welcome to all our viewers on CFO Insight. I am Sherry, a financial technology consultant at Hyperbots, and I’m very excited to have John Silverstein here with me, who is a seasoned finance executive with over two decades of experience in leadership roles, with expertise across both Fortune 500 companies and high-growth startups. Thank you so much for joining us today, John. We will discuss the critical topic of structuring tax heads in the chart of accounts. To start, could you explain why having a well-structured tax head is important in a company’s startup accounts?

John Silverstein: Yeah, it’s critical to have structured accounts and make sure that it aligns with not just tax but your other areas, as we’ve discussed before. The tax heads in your chart of accounts are essential for several reasons. They ensure that you’re accurately tracking your tax liabilities, recoverable, and expenses, which is critical for your compliance with tax regulations. Additionally, they provide clarity in financial reporting, aid in the reconciliation of tax accounts, and reduce the risk of penalties due to misclassification or errors. Proper structuring also facilitates smoother audits and enhances decision-making by providing clear insights into a company’s tax position.

Sherry: And from your vast experience, can you provide some examples of different tax heads that might be necessary for various industries, like manufacturing, retail, or SaaS?

John Silverstein: Yeah, they all have their nuances. We can talk first about the manufacturing industry, where your tax heads might include sales tax payable, excise duty payables, and customs duty payables. In retail, it’s a little different; you might see sales tax payable, output GST/VAT payable, input recoverable of GST/VAT, and property taxes. So a few different accounts need to be split between the appropriate areas for compliance reasons. Meanwhile, for SaaS companies, relevant tax heads might include service tax payable, and that’s an important distinction. Sometimes you have mixes between your industries based on the companies you work with, where you might have service tax and sales tax and different components of sales tax. So getting compliance right and connecting to a tool, AI can help with this as well. On the SaaS side, you also have withholding tax payable and recoverable. Each industry has its unique challenges, and it gets more challenging as you mix services and manufacturing.

Sherry: In your opinion, what are some of the best practices for structuring tax heads in the chart of accounts?

John Silverstein: Yeah, making sure that it’s organized by nature—like if it’s a tax payable, recoverable, or tax expense. When we were going through specifics on manufacturing, splitting them allows you to easily see which taxes you’re paying. Aggregating and putting just a tax line doesn’t help. The timing and different regulations and compliance you need to meet vary. It also makes it easier to audit if split out.

Sherry: In your journey in the finance industry, what are some common mistakes you’ve seen accountants make when structuring tax heads in the chart of accounts?

John Silverstein: Common mistakes include improperly classifying where you group taxes incorrectly, and mixing sales and property taxes. The key is to split it out into different regulatory bodies. You also want to customize for specific jurisdictions to align with those regulations. It doesn’t necessarily have to be in the chart of accounts, depending on your system and tax systems, but you do need at least the bare minimum of proper classification and grouping. You need the granularity to understand those different types because they’re all calculated differently. Make sure to keep compliance with tax laws, so you don’t have compliance issues. Another common mistake is failing to reconcile your tax liability regularly. This often gets overlooked and is only thought about once a year. It’s much better to work with your tax advisors to book your taxes every month, so you understand your true liability from a working capital standpoint.

Sherry: Adding on to the question, how should federal and state income taxes be structured in the chart of accounts?

John Silverstein: Federal and state income taxes should be structured separately in the chart of accounts, allowing for visible and accurate reporting.  You don’t want to go crazy, though, because all the states are different. You can manage granularity outside the chart of accounts; otherwise, you’ll end up with over 50 tax accounts, which is unmanageable. It’s critical to get the right granularity and split the types of taxes as we discussed earlier. Federal income taxes, state taxes, payables, and liabilities need to be broken out separately for precise tracking of obligations and payments. This separation simplifies the reconciliation of payments and helps you understand when to make those payments, as federal taxes are a little different from state taxes. Additionally, businesses should consider having provisions for deferred tax assets and liabilities. This can vary between federal and state levels, so breaking them out appropriately ensures compliance and accounting standards while providing easy visibility.

Sherry: Since AI is transforming the finance landscape, how can AI help manage and improve the tax structure of a company’s startup accounts?

John Silverstein: AI will significantly enhance the management of your tax structures. Often, even as a CFO, you’re working with outside tax advisors, sending data back and forth. AI can streamline reporting requirements and calculations. It reduces human errors between your tax books and management accounting books. It will help ensure reconciliation and capture the right data for complicated jurisdictions, as well as compliance with tax laws and regulations. AI can go through data to ensure appropriate allocation and compliance while providing suggestions based on learning models. The accuracy will improve, and AI can help detect and correct misclassifications. Additionally, having reporting and analytics on taxes can shed light on often-overlooked areas, helping you better understand tax calculations, which can be quite complex.

Sherry: To dive a little deeper into the previous question, could you provide a specific example of how AI can help a company in a particular industry, like retail or SaaS, better manage its tax structure?

John Silverstein: Sure! For a retail company operating in multiple states, it has complexities in managing sales tax, each with different rates and rules. AI can automate the categorization of transactions based on state and sale, applying the correct tax rates. AI can also help reconcile sales taxes and ensure you’re collecting the correct amounts. If you don’t collect sales tax, recovering it can be challenging. AI can help identify errors and prepare for audits, reducing tax penalties, especially since sales tax complexities can lead to audits from various states. For SaaS companies, AI can determine tax obligations based on where services are delivered and where servers and customers are located, classifying transactions correctly. Real-time compliance reporting is critical, and these industries will benefit greatly.

Sherry: What role does real-time monitoring play in managing tax structures with AI, and why is it beneficial?

John Silverstein: Real-time monitoring allows AI to track changes in tax laws and regulations, instantly reflecting these changes in your chart of accounts.  If something changes and you need to track it differently, AI can prompt you to make those adjustments. Often, tax advisors inform you about upcoming changes, but being proactive is crucial. AI helps identify discrepancies or non-compliance and keeps you informed about your tax liabilities and exposures.

Sherry: What are some future trends you see in the integration of AI with tax management in charts of accounts?

John Silverstein: With a shortage of accountants and tax professionals, AI will play a huge role in automating tasks, optimizing strategies, and predicting tax exposures. AI will manage more complex scenarios, providing companies with precise insights on structuring and jurisdiction changes. For smaller companies, AI can suggest strategies they might not have considered, making tax management more accessible. It will also automate routine tasks for accountants, such as reporting and compliance changes, allowing them to focus on enhancing tax strategies and governance.

Sherry: Thank you so much, John, for these valuable insights on managing tax heads in the chart of accounts. I’m sure our viewers will find your perspective on how AI can transform tax management particularly enlightening.

John Silverstein: Thanks, Sherry.