Chapter 9: Business Income, Deductions, and Accounting Methods

Question 0

What is an accounting method?

Answer 0

The procedure for determining the taxable year in which a business recognizes a particular item of income or deduction thereby dictating the timing of when a taxpayer reports income and deductions

Question 1

What is the 12 month rule?

Answer 1

A regulation that allows prepaid business expenses to be currently deducted when the contract does not extend beyond 12 months and the contract period does not extend beyond the end of the tax year following the year of the payment

Question 2

What is the All-events test?

Answer 2

Requires that income or expenses are recognized when (1) all events have occurred that determine of fix the right to receive the income or liability to make the payments and (2) the amount of the income or expense can be determined with reasonable accuracy

Question 3

What is the allowance method?

Answer 3

Bad debt expense is based on an estimate of the amount of the bad debts in accounts receivable at year-end

Question 4

What is the Arm’s-length amount?

Answer 4

The price in transactions among unrelated taxpayers, where each transacting party negotiates for his or her own benefit

Question 5

What is a casualty loss?

Answer 5

A loss arising from a sudden, unexpected, or unusual event such as a “fire, storm, or shipwreck” or loss from theft

Question 6

What is the deferral method?

Answer 6

this method recognizes income from advance payments for goods by the earlier of (1) when the business would recognize the income for tax purposes if it had not received the advance payment or (2) when it recognizes the income for financial reporting purposes

Question 7

What is the direct write-off method?

Answer 7

The required method for deducting bad debts for tax purposes. under this method, businesses deduct bad debt only when the debt becomes wholly or partially worthless

Question 8

What is the Domestic production activities deduction (DPAD)?

Answer 8

a deduction for businesses that manufacture goods in the US

Question 9

What is an economic performance test?

Answer 9

The third requirement that must be met for an accrual method taxpayer to deduct an expense currently. The specific event that satisfies the economic performance test varies based on the type of expense

Question 10

What are Flow-through entities?

Answer 10

legal entities like partnerships, limited liability companies and S corporations that do not pay income tax. Income and losses from flow-through entities are allocated to their owners

Question 11

What is the full-inclusion method?

Answer 11

The method for accounting for advance payments for goods that requires that businesses immediately recognize advance payments as taxable income

Question 12

What is the impermissible accounting method?

Answer 12

an accounting method prohibited by tax laws

Question 13

What are mixed-motive expenditures?

Answer 13

activities that involve a mixture of business and personal objectives

Question 14

What is a payment liability?

Answer 14

liabilities of accrual method businesses for which economic performance occurs when the business actually pays the liability for, among others: workers comp., tort, breach of contract or violation of law; rebates and refunds; awards, prizes, and jackpots; insurance, warranties, and service contracts provided to the business; and taxes

Question 15

What is the permissible accounting method?

Answer 15

An accounting method allowed under the tax law. Permissible accounting methods are adopted the first time a taxpayer uses the method on a tax return

Question 16

What are personal expenses and are they tax deductible?

Answer 16

expenses that are incurred for personal motives and are not deductible for tax purposes

Question 17

What is the qualified production activities income (QPAI)?

Answer 17

the net income from selling or leasing property that was manufactured in the US

Question 18

What is meant by reasonable in amount?

Answer 18

an expenditures is reasonable when the amount paid is not extravagant nor exorbitant

Question 19

What is a recurring item?

Answer 19

an election under economic performance to currently deduct an accrued liability if the liability is expected to persist in the future and is either not material or a current deduction better matches revenue

Question 20

What is a 481 adjustment?

Answer 20

a change to taxable income associated with a change in accounting methods.

Question 21

What is the specific identification method?

Answer 21

An elective method for determining the cost of an asset sold. Under this method, the taxpayer specifically chooses the assets that are to be sold

Question 22

What is the Uniform cost capitalization rules (UNICAP rules)?

Answer 22

Specify that inventories must be accounted for using full absorption rules to allocate the indirect costs of productive activities to inventory