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Flashcards in Taxes: Accounting Methods & Periods Deck (6)
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1

Taxes:
Accounting Methods & Periods
Realization

Realization
- event that triggers taxation
- generally results from recipet of property or right capable of valuation
- realization/recognition cannot happen if item cannot be valued
- return of capital is not income
- some rules may exclude from income or defer taxation

2

Taxes:
Accounting Methods & Periods
General

Accounting Methods & Periods
- some corporate taxpayers have restrictions on the year-end chosen
Accrual Method
- similar to financial accounting
-except:
- prepaid income recognized in year received
- to extent accrued expenses are deductible, use in year liability becomes certain
Cash Method
- recognizes income in year received
- taxpayer has no AR
- prepaid expenses are prorated if total recognition would distort
Cannot use Cash Method
- C Corporations
- Partnerships with C Corporations as partners
- Tax Shelters
- Following entities:
1. corporation (C or S) whose cash receipts do not exceed $5M for average 3 year period.
2. certain farming businesses
3. qualified personal service corporations: qualifying activities and 95% owned by employees
Cannot Change After Election

3

Taxes:
Accounting Methods & Periods
Inventory

Inventory
- in general businesses with inventories must use accrual method
- taxpayers whose annual gross receipts don't exceed $1M can use the cash method for purchase and sales accounts
- taxpayers whose annual gross receipts don't exceed $10M but are greater than $1M can use the cash method for purchase and sales accounts if primary business is services

4

Taxes:
Accounting Methods & Periods
Inventory
Uniform Capitalization Rules

Uniform Capitalization Rules
- manufacturers, retailers, and wholesalers must use UniCap.
- capitalize all direct and indirect costs allocable to property they produce and property bought for resale
- costs are allocated to inventory and property sold during the year
- on property constructed, built, installed, manufactured, developed or improved.
Except:
- small personal property dealers (less than $10M gross receipts in previous 3 years)
- long term contracts
- certain farming
- certain creative expenses and personal property
- intangible drilling
- natural gas
- research and experiments
Costs to be Capitalized
- direct material, direct labor, and all indirect production
- NOT marketing, selling, and distributing or G&A
- storage cotst required to extent they can be traced to off-site facility
Valuation
- Use LCM unless LIFO

5

Taxes:
Accounting Methods & Periods
Long-Term Contracts

Long-Term Contracts
- project that takes more than one year
- GR: % of completion method
- completed contract would all to defer until year of completion. Can be used by:
1. $10M or less in average receipts over 10 year period in previous 3 years if expected to last no longer than 2
2. home construction contractors
3. contract where less than 10% of total costs relates to construction of property on land

6

Taxes:
Accounting Methods & Periods
Prepaid Items

Prepaid Items
- taxed when received
- not lease deposits if they will be returned to lessee (taxed when lessor receives unrestricted right to them)
- can elect to receive prepaid service income when received.
- prepayment for goods can be deferred
- prepaid dues/subscriptions reported over period used
- long term contracts have another slide
- leasehold improvements: FV is income to landlord if made in lieu of rent

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