Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Survey Of Taxation > Chapter 11: Accounting Periods And Methods > Flashcards

Chapter 11: Accounting Periods And Methods Flashcards

1
Q

How does the choice of accounting method affect taxable income

A

Determines when income and expenses are reported (not whether they are reported)

Can accelerate or postpone tax payments

Can actually lower taxes by spreading income across multiple periods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Accounting period for taxpayers who do not have “books”

A

(individuals with wage income)

Required to use calendar year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

When does a business choose a tax year

A

Elected on the first tax return filed and cannot be changed without consent of the IRS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Tax year for partnerships

A

Must use same tax year as majority partners (who own over 50% of partnership income/capital)

  • if majority partners have different tax years must use the tax year of principal partners
  • if principal partners have different tax years must use the taxable year resulting in least aggregate deferral of income to partners

Unless partnership can establish to IRS the business purpose of the different year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Principal partners in a partnership

A

Have more than 5% interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Accounting period for s corps and personal service corporations

A

Must use calendar year unless can show business purpose for fiscal year (may use fiscal year if making required payments or distributions)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Consequences of improper use of fiscal tax year

A

Loss of option to use fiscal tax year: must use calendar year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

52-53 week year

A

Law that allows taxpayers to use a tax year that always ends on the same day of the week - means that the tax year will vary between 52 and 53 weeks

Must end on either the last occurrence of a day in a calendar month (up to six days before EOM) or on the occurrence of the day that is closest to the end of the month (up to 3 days before OR AFTER EOM)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Changes in tax law for companies that use a 52-53 week year

A

Treated as if tax year ends on the last day of the month for the purpose of determining tax law

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Accounting period C corporations

A

Fiscal year of choice (exception for personal service corps)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Section 444 election

A

Allows partnerships, s corps, and personal service corps to elect a taxable year that results in a tax deferral of three months or less (from calendar year)

Also grandfathers in businesses that were using fiscal years prior to requirement for calendar year being passed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Requirements if taking section 444 election

A

-must make required payments by may 15th of following year
- payment = maximum tax rate for individuals + 1% * previous year’s taxable income * deferral ratio

  • adjusted for distributions to owners. No payment if amount due is $500 or less

Deferral ratio= # of months in deferral period / # of months in the taxable year

Payment is not a credit for business owners but rather decreases current year’s required payment by previous year’s required payment (negative amount = refund)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Personal service corporation section 444 election

A

Deductions to shareholder employees may be limited of distributions to such individuals do not exceed a minimum amount

(Deductible payments to owners during the deferral period may not create a tax deferral so must be at a rate no lower than the previous fiscal year)

May use three year average to compute minimum distribution

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Natural business year

A

Ends at or soon after the peak income earning period (at least 25% of incomes occur during the last two months of the year)

Business without a peak income period may not be able to establish a natural business year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

When may an accounting period be changed without IRS approval?

A
  • upon marriage if changing to confirm to spousal tax year for joint return purposes (election must be made within first two years of marriage)
  • changing to a 52-53 week year that ends in the same month as the previously used tax year
  • correction to misfiled returns if bringing tax year into alignment with bookkeeping year
  • corporation if: there has been no change of accounting period in last 10 years, resulting year does not have NOL, taxable income for resulting short year is at least 90% of income for proceeding full tax year AND there is no change in the status of the Corp
  • partnership if: majority partners have the same tax year or if principal partners change to the tax year
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Situation where a business is required to change their tax year

A

A subsidiary Corp filing a consolidated return with it’s parent must conform to the parents tax year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

When may a tax return be for an accounting period of less than 12 months

A
  • filing first or final return (no prorating required. Filed as if for a 12 month period)
  • when taxpayer changes accounting periods
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Requirements for short period tax filing when changing accounting period

A

Must ANNUALIZE income for resulting period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

How to annualize income

A
  • determine modified taxable income (deductions MUST be itemized)
  • multiply result by 12/number of months in short period
  • compute tax on resulting taxable income
  • multiply the resulting tax by: number of months in short period / 12
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

When GAAP conflicts with tax regulations

A

For tax purposes the tax regulations must be followed

GAAP used if regulations don’t specify or if there are multiple options for treatment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Writing down obsolete or slow moving inventory

A

Per IRS regulation cost can only be reduced when price is reduced (so it clearly reflects income)
Items not salable at normal price (damaged, obsolete, shop worn) may be valued at a bona fide selling price reduced by the direct cost of disposal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

UNICAP

A

Uniform capitalization rules

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Options for valuing inventory

A

May be valued at cost or at the lower of cost or market value (unless taxpayer uses LIFO then may not use LCM)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Inventory cost of merchandise

A

Invoice price less trade discounts plus freight and handling charges

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Treatment of purchasing, warehousing, packaging, and administrative costs

A

Must be allocated between CoGS and inventory per UNICAP

Required for taxpayers whose average gross receipts for the preceding three years exceed $26M (2021)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

UNICAP rules for goods manufactured by the taxpayer

A

Essentially expanded full absorption method. Direct labor, materials, and overhead must be included in value of inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Overhead items manufacturing co. Must include in inventory cost

A
  • factory repairs and maintenance, utilities, rent, insurance, small tools, all depreciation
  • factory admin and officer’s salaries related to production
  • tax other than income tax
  • quality control and inspection
  • rework, scrap, and spoilage
  • current and past service costs of pensions and profit sharing plans
  • service support costs (purchasing, payroll, warehousing)

Basically anything that directly supports manufacturing (so not marketing, selling, R&E)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

When must interest be inventoried

A

Real property
Long-lived property
Property requiring more than two years (or one year if costs >$1M) to produce

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Service support costs included in inventory

A

Must be allocated between manufacturing and non manufacturing and the manufacturing costs included in inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

When may a manufacturer use standard costs to value inventory

A

If any significant variance is reallocate pro rata to ending inventory and CoGS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Allowable inventory costing method

A

FIFO, LIFO, average cost, specific identification

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Why do taxpayers use LIFO

A

During inflationary periods (rising prices) LIFO results in the lowest inventory value/highest CoGS and so the lowest taxable income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Tax requirements if using LIFO for tax purposes

A

Must also use LIFO for financial accounting (though may disclose what income would be under FIFO etc)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

How do taxpayers adopt LIFO for tax purposes

A

Form 970 or other statement accepted by IRS attached to return for tax year where LIFO first used

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Record keeping for LIFO & dollar-value lifo

A
  • use of dollar-value pools and government price indexes (like CPI or Producer price index)

Inventory divided into pools

If a particular pool is depleted the taxpayer loses the right to use the lower prices associated with past layers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Simplified LIFO method

A

May be used by taxpayers with average annual gross receipts of $5M or less for current and two preceding years

Uses a single LIFO pool

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Calculating inventory cost under simplified LIFO method

A

Base year price index/current year index * current year ending inventory = current year ending inventory in base year prices

Subtract last year ending inventory to find current layer and multiply that by current year/base year index to return to current year price

Add current year layer to base year (and any previous) layer to get ending inventory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Lower of cost or market

A

Option available unless taxpayer is using LIFO

Inventory is valued at the lower of original cost or current replacement cost on the date of valuation

Must be applied to each item in inventory individually

(Obsolete or slow moving inventory can be written down only if selling price has been reduced)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

Market value for LCM

A

Price at which taxpayer can REPLACE the goods in question (not selling price)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Cycle inventory valuation

A

Per Congress a taxpayer may count inventory on a cycle (rather than annually) and then adjust quantities for estimated shrinkage at year end based on past experience

Allowed specifically when “the taxpayer makes proper adjustment to such inventories and its estimation method for actual shrinkage”

41
Q

Long term contracts

A

Building, installation, construction, or manufacturing contracts that are not completed within the same year in which they began.

Only counts if item is not normally carried in finished goods inventory or normally requires more than 12 months to complete

Contracts for services do not count

42
Q

Accounting methods available for long-term contracts

A
  • percentage completion method
  • modified percentage completion method
  • completed contract method (limited circumstances only)
  • any other accounting method that clearly reflects income

Whichever used must be used for all long term contracts in same trade or business and cannot be changed without permission

43
Q

Percentage of completion long term contract accounting method

A

Taxpayer reports a percentage of gross income from the contract based on the portion of the work that has been completed

Revenue for year = contract price x % complete

% determined by dividing costs to date by expected costs

44
Q

Completed contract long term contract accounting method

A

Income from a project recognized & taxable when project completed no matter when price is collected.

Costs capitalized (accumulated in work-in-progress account) and deducted from revenue in year project complete

Concept of completion may vary (total completion and acceptance vs substantial completion)

Defers tax on revenue but may result in overall higher tax rates

45
Q

Which costs are subject to long-term contract rules

A
  • direct contract costs
  • labor, materials, overhead (allocated)
  • admin costs (allocated, for percentage and modified percentage methods only)
  • interest (costs directly attributable and those that could have been avoided without the contract(
46
Q

When may the completed contract method be used

A
  • by smaller companies (whose average gross receipts from the preceding three tax years is $26M or less) on construct project expected to take two years or less
  • for home construction contracts
47
Q

Modified percentage of completion method

A

Taxpayer defers estimating total costs of project/reporting income from a contract until they have incurred at least 10% of total costs

If less than 10% of costs are incurred in first year of construction they included in the second year when costs are more accurately estimated

48
Q

Look-back interest

A

Once a contract is complete (under percentage of completion or modified method) must determine if tax paid each year during the contract is more or less than tax that would have been paid the the actual cost had been used instead of estimated cost

If actual tax paid was less, interest is paid on the additional

If tax paid was more taxpayer receives interest on the additional

49
Q

When must look-back interest be calculated?

A
  • contracts completed more than two years after the commencement date
    AND
  • only if the contract price equals or exceeds either 1% of the taxpayer’s average gross receipts for the three preceding taxable years before the tax year in which the contract was entered OR $1M
50
Q

De-minimis exception to look back interest computation

A

If income reported each year on a contract is within 10% of recomputed look-back income then no interest computation is made for the contract

If elected applies to all contracts completed within a year. Must be determined separately for each completed contract that year. Can only revoke election with IRS approval

51
Q

Installment sales method

A

Gain from installment sales may be spread over collection period unless taxpayer elects not to use it

Applicable only to gains.

Not applicable to sales of inventory or marketable securities

May be used by cash or accrual method taxpayers

52
Q

Installment sales

A

Any disposition of property where at least one payment is received after the close of the taxable year in which the disposition occurs

53
Q

Contract price

A

Greater of the gross profit (selling price minus basis, expenses and depreciation recapture) or the selling price reduced by any existing mortgage assumed or acquired by the purchaser

54
Q

Gross profit percentage

A

Gross profit / contract price

55
Q

Computing income under installment sales method

A

1) selling price less basis, expenses, depreciation recapture = gross profit
2) contract price = greater of gross profit or selling price reduced by existing mortgage assumed by purchaser
3) gross profit/ contract price = gross profit percentage
4) net gain recognized in year of sale = (collections of principal + excess mortgage)* gross profit percentage
Plus depreciation recapture = gain reported in year of sale
4) gain reported in subsequent year =collection of principal x gross profit percentage

56
Q

Excess mortgage

A

= mortgage - basis - selling expense - depreciation recapture

57
Q

When to report depreciation recapture

A

In year of sale even if no payment received that year

58
Q

Installment method if purchase price of disposed of property was deducted in year or purchase under sec. 179

A

Gain on sale covered by section 1245 and must be reported in the year of sale even if the full amount is not received

Makes installment method not helpful

59
Q

Why is installment method often used for real estate

A

The cost of real estate cannot be deducted in the year of purchase under sec. 179

60
Q

What if seller holding an installment obligation does not hold it to it’s full maturity

A

Holder must determine adjusted basis of obligation in order to compute gain or loss on obligation

Gain or loss = selling price - adjusted basis of installment

61
Q

Adjusted basis of an installment obligation

A

= Face amount of the obligation - gross profit that would have been realized if face amount collected
AKA
= Face amount * (100% - gross profit percentage)

62
Q

Gift of an installment obligation

A

Donor must recognize gain or loss if the difference between the face value of an obligation and it’s adjusted basis

63
Q

Cases where donor of installment obligation is not taxed but rather recipients report income when installments collected

A
  • transfers of installments to controlled corporations under section 351
  • certain corporate reorganizations and liquidations
  • transfers on the death of a taxpayer
  • transfers incident to divorce
  • distruction by partnerships
  • contributions of capital to partnerships
64
Q

Repossession of property sold in an installment basis

A

Taxable event

Gain or loss = difference between value of repossessed property (reduced by any costs incurred in repossession) and adjusted basis of remaining installment obligation

New basis is FMV at time of repossession

Gain or loss has same character as gain or loss on original sale

65
Q

Limitation on gain from repossession of real property

A

Limited to the lesser of:
- gross profit in remaining installments reduced by costs incurred in repossession, or
- cash and FMV of other property received from the buyer in excess of the gain previously recognized

66
Q

Rules for installment sales for more than $150,000

A
  • if taxpayer borrows funds with installment obligation as security the amount borrowed = payment on installment obligation
  • it installment method is used interest must be paid to government on deferred tax (for deferred principal payments over $5M)

Do not apply to sales of personal-use property, trade or business property, or sales of timeshares or residential lots

67
Q

Installment sales between related person when property is resold by related purchaser

A
  • first seller must treat amounts received by related person as personally received (gain reported in year(s) in which proceeds received by second seller
  • applicable if resale takes place within two years of initial sale
68
Q

If installment sale method is not applicable or if taxpayer elects out

A

Accrual method: amount receivable from buyer is part of amount realized (entire gain or loss reported in year of sale)

Cash method: FMV of installment obligation treated as part of amount realized in year of sale (amount realized cannot be less than FMV of property sold less consideration received

69
Q

If value of obligations received cannot be determined

A

Said to have indeterminate market value

Value assumed to be no lower than the value of property sold less the value of property received

If have value of property sold: gain = value less basis

70
Q

Contingent payment sale

A

A sale or other disposition of property in which the aggregate selling price cannot be determined by the close of the tax year in which the sale took place

71
Q

When is imputed interest used

A

In a deferred payment contract where no interest rate or a low interest rate is provided

72
Q

Tax consequences of imputed interest rules

A

Sellers must reallocate payment received between interest (fully taxable) and principal (only gains taxable)

May increase income reported in early years and decrease in later years

Also applies to buyer for interest deduction

73
Q

Transactions exempt from imputed interest rules

A
  • debt subject to original issue discount provisions
  • sales of property for $3,000 or less
  • sales where all payments are due within six months
  • sales of patents to the extent the payment is contingent on the use of disposition of the patent
  • certain carrying charges for personal property or educational services covered by section 163(b) where interest charge cannot be ascertained
  • charges for the purchase of personal use property (purchaser may not use imputed interest)
74
Q

Applicable federal rate

A

Interest rate determined monthly, based on the rate paid by the federal government on borrowed funds. Varies with term of loans:
Short term (< 3 yrs)
Mid term (3 yrs> but <9yrs)
Long term (9 yrs+)

75
Q

What interest rate must be used to avoid imputed interest

A

At least 100% of applicable federal rate

(110% for sale-lease back arrangements)

76
Q

When are interest rates below the applicable federal rate allowable?

A
  • it stated principal amount for qualified debt obligations issued in exchange for property under sec 1274A does not exceed $2.8M: interest limited to 9% compounded semiannually
  • sale of land between related individuals for under $500,000: interest limited to 6% compounded semiannually
77
Q

When to report imputed interest

A

Generally when it is accrued

78
Q

When may a borrower and the lender jointly elect not to accrue interest

A

If stated principal does not exceed $2M, and if lender is not an accrual method taxpayer or a dealer this approach cannot be used

79
Q

Exceptions to requirement of reporting imputed interest when it accrues

A
  • sale of personal residence
  • (most) sales of farms for $1M or less
  • sales involving aggregate payments of $250,000 or less
  • sale of land between related persons (unless price exceeds $500,000)

Interest expense/ income only reported when final payment is made

80
Q

Other situations where imputed interest applies

A
  • gift loans
  • corporate shareholder loans
  • compensation-related loans
  • tax avoidance loans in general
81
Q

Tax avoidance loans

A

Low-interest or interest-free loan that produces tax savings

82
Q

Tax treatment of imputed interest

A
  • interest (generally determined using applicable federal interest rates) is taxable to the lender
  • may be deducted by the borrower (usual guidelines apply)
    -lender is treated as returning imputed interest to borrower (if amount large enough could result in gift tax)
83
Q

Corporation shareholder loans

A

If corporation makes an interest free loan to a shareholders they must imputed interest and then the interest is treated as being paid back to the Shareholder as a dividend (shareholder must recognizes as income)

84
Q

Tax consequences of compensation-related loans

A
  • interest imputed is considered compensation paid by employer and received by employee
  • taxable to employee and (if reasonable) deductible by the employer
85
Q

Times when imputed interest is not used or is limited

A
  • gift loans between individuals totalling $10,000 or less (unless borrowed funds used to purchase income-producing property)
  • If gift loans between individuals total $100,000 or less imputed interest is limited to the borrower’s net investment income (If less than $1000, not necessary to impute interest)
  • compensation-related or corporate shareholder loans of $10,000 or less

UNLESS TAX AVOIDANCE IS PRINCIPAL PURPOSE OF THE LOAN (then imputed interest always applies)

86
Q

How is an accounting method selected?

A

Usually simply by applying the selected method when computing income for the initial tax return or the tax return for the first year in which the item occurs

87
Q

Can taxpayers change accounting methods?

A

Yes, but generally not without IRS approval

88
Q

Accounting changes that can be made without IRS approval

A

Adoption of LIFO inventory method (then cannot switch back without approval)

89
Q

How are errors in tax returns corrected?

A

Normally by filing an amended return for the year(s) in which the error occured

90
Q

Statute of limitations for correcting tax filing errors

A

Three years

After which tax year is closed and no further changes can be made

91
Q

How to request to change accounting methods

A

File form 3115. One copy to IRS on or before return due date and one copy with the tax return

Can request a change of accounting methods when filing an amended return if filing within six months of the due date

92
Q

Under what circumstances will the IRS automatically approve accounting changes

A
  • form 3115 filed properly
  • taxpayer agreed to take into account the section 481(a) adjustment
  • taxpayer is not under examination
  • accounting method has not been changed within previous four years
93
Q

Are changes in accounting methods retroactive?

A

Generally not but may be in case of misstatement or omission of materials facts or changes in applicable authority

94
Q

How are duplications or omissions of revenues or expenses handled in the case of a change of accounting methods?

A

Must be accounted for as a net amount either added to or subtracted from income

For amounts of $3000 or less the entire amount is accounted for in the year of the change

95
Q

Reporting net change from change in accounting methods if over $3000

A

Voluntary change of accounting method: must report over a period not exceeding four years, divided equally, beginning in the year of change. (Cannot be spread over a period longer than method has been used) If $25,00 or less may elect to include full amount in the current year

If involuntary change: IRS decides method

96
Q

If changing from computing taxable income differently from book income to computing in the same way

A

Should not require IRS approval

97
Q

If a different method of reporting is used for tax vs book records

A

As long as financial and book income are reconciled the taxpayer may not have to change the methods to be the same

98
Q

Form for installment sale income

A

Form 6252

(Installment sales other than inventory)

Separate form for each installment sale

99
Q

Changing to LIFO inventory method

A

No filings necessary if using LIFO from start

If switching to LIFO do not need approval but should file form 970 in the year of change

If LCM was used must restate beginning inventory to cost because LCM cannot be used with LIFO but adjustment can be spread over year of change + next two years

Survey Of Taxation (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions