Unit 2

Question 1

52/53 week tax year

Answer 1

Instead of a calendar tax year or a physical tax year that are both 12 consecutive months

This variation does not have a fixed end date

Ranges from 52 to 53 weeks in length

May not always end on the last day of the month

Some businesses opted for a specific day of the week as their fiscal year end, such as the final Friday and June

Question 2

When would you see a short tax year?

Answer 2

The first or last year of an entities existence

Or when an entity changes its accounting. (from fiscal to calendar or vice versa.)

Question 3

How does a business adopt or elect a tax year?

Answer 3

When it files its first income tax return

Question 4

Determining an estate tax year

Answer 4

The taxpayers death marks the end of an individuals final tax year

The following day is the beginning of the first tax year for the decedents estate

The first tax year is any period of 12 months or less that ends on the last day of the month

Can have a short tax year and use December or choose another month and have a fiscal tax year

Question 5

What form is used to request a change in the tax year?

Answer 5

Form 1128, application to adopt, change, or retain a tax year

Question 6

The IRS requires the use of the calendar year in the following instances

Answer 6

If the business keeps no books or records

There is no annual accounting period

The internal revenue code or IRS regulations require the use of a calendar year

Question 7

What is the tax return due date for an estate, formed 1041

Answer 7

The 15th day of the fourth month, following the end of the entities tax year

With an extension of 5 1/2 months after the original due date (on the last day of the month and not the 15th of the month)

Question 8

Requirement for partnerships and corpse to use a required tax year

Answer 8

The partnership or S corporation tax year must conform to its partners tax years

If one or Moore partner with the same tax year, owns a majority interest in the partnerships capital and profits, the tax year of those partners is the required tax year for the partnership (if owned by a corporation with a fiscal year)

If no majority interest tax year, the partnership must use the tax year if all the principal partners have the same tax year

If no majority interest, and all the principal partners do not have the same tax, the partnership must use the tax year that would result in the least aggregate deferral of income to its partners

Question 9

Establishing substantial business purpose for an alternate tax year

Answer 9

A business can establish a business purpose for using a fiscal year, and corporation or partnership must generally use the calendar year

Form 1128, application to adopt, change, or retain tax year is used to establish a bona fide business purpose for a tax year

Sometimes called a natural tax year – follows the natural cycle of the business itself with a fiscal year in which the last two months of the year provide over 25% of gross receipts for the entire year

Question 10

PSC

Answer 10

Personal service corporation

Question 11

Section 444 election - what is it, requirements to make election

Answer 11

A partnership, corporation, or personal service corporation can request to use a tax year other than it’s required tax year by filing form 8716, election to have a tax year other than a required tax year

A business can request a section 44 for election if it meets all of the following requirements

1. It is not a member of a tiered structure.
2. It has not previously had a section 444 election in effect.
3. It Alexa that meets the deferral period requirement.

Also must generally make certain required payments based upon the value of the tax deferral, the owners received by using a tax year different from the required tax year

Question 12

Section 444 – deferral period

Answer 12

Deferral period is the number of months between the beginning of the retained year and the end of the first required tax year

If the election is to retain its tax year, it may only do so if the deferral period is three months or less

If requesting an adoption or a change to a tax year, the deferral period is the number of months from the end of the new tax year to the end of the required tax year

The IRS will allow a section 444 election only if the deferral period is less than the shorter of

1. Three months or.
2. The deferral period of the tax year being changed.

Question 13

Section 444 election remains in effect until

Answer 13

It is terminated

If the election is terminated, another section 444 election cannot be made for the same tax year

It also ends automatically when any of the following occurs :

1. The entity changes to its required tax year.
2. The entity liquidates.
3. The entity becomes a member of a tiered structure.
4. The IRS determines that the entity willfully failed to comply with the required payments or distributions.
5. The entity is an corporation, and the election is terminated.

Question 14

Tax return due date of partnership and S corporations

Answer 14

Due on the 15th day of the third month, following the end of the year

For a calendar year partnership and corporations are due March 15

Question 15

C corporation tax return due date

Answer 15

Due on the 15th day of the fourth month, following the end of the tax year

For a calendar year – tax return due on April 15 of the following year

Question 16

Tax return filing requirement if a business ceases operations before the end of their year

Answer 16

Would be the 15th day of the third or fourth month, following the close of its short tax year

If a sea corporation dissolves on July 22, 2023 - the final return is due by November 15, 2023

Question 17

Nonprofit entities filing due date

Answer 17

Returns are due on the 15th day of the fifth month following the end of their tax year

If using a calendar year, that would be May 15

Extended due date November 15 or six months

Question 18

Sole proprietorship filing deadline

Answer 18

April 15 – extended due date, October 15

Question 19

Partnerships, filing due date

Answer 19

15th day of the third month equals March 15

Extended due date September 15, six months

Question 20

C corporations, filing due date

Answer 20

15th day of the fourth month equals April 15

Extended due date October 15 or six months

Unless the fiscal year ends June 30 – resulting and only three months, not four months with a due date of September 15, and extended due date of April 15 (7 months)

Question 21

As corporation filing due date

Answer 21

15th day of the third month following the tax year

If a calendar year equals March 15

Extended due date of September 15 or six months

Question 22

Form 1041 or trust and fiduciary returns filing due date

Answer 22

15th day of the fourth month equals April 15 on a calendar year

Extended due date September 30, only 5 1/2 months

Question 23

FBAR filing due date

Answer 23

April 15 with an extended due date of October 15

The extension is automatic without the need to request

Question 24

Retirement plans, form 5500 – filing requirement

Answer 24

July 31, extended due date of October 15

Question 25

Estate tax return, form 706 – filing requirement

Answer 25

Nine months after death, with a six month extension allowed

Question 26

What types of accounting methods are used to report taxable income?

Answer 26

Cash method Accrual method Special methods of accounting for certain items of income and expenses Hybrid method – using elements of the methods above

Question 27

The accrual method is required for

Answer 27

Publicly traded corporations Large nonprofit entities also often required to use a cruel method – because of receiving federal grants and having required audited financial statements

Question 28

What businesses are required to use accrual method for accounting?

Answer 28

Any tax shelter, regardless of its size A C corporation, or a partnership with a C corporation partner, with average annual gross receipts over the three prior tax years exceeding $30 million

Question 29

What businesses can use the cash method for accounting?

Answer 29

30 million or less in annual gross receipts and 2024, regardless of the taxpayers industry or whether or not the business produces inventory This qualifies a business as a small business However, corporations and partnerships can use the cash method, regardless of their annual gross receipts

Question 30

Form 3115

Answer 30

Application for change in accounting method Used to switch from a cruel method to the cash method or vice versa

Question 31

12 month rule for certain prepaid expenses

Answer 31

Special rule which the cash basis taxpayer is not required to capitalize amounts paid for periods that do not extend beyond the earlier of the following 12 months after the benefit begins Or The end of the tax year after the tax year in which payment is made

Question 32

Constructive receipt and cash method accounting

Answer 32

For tax purposes, constructive receipt is the same as actual receipt of income

Question 33

Restrictions for the hybrid accounting method

Answer 33

1. If an entity uses the cash method for reporting income, it must use the cash method for reporting expenses. 2. If an entity uses the accrual method for reporting expenses, it must use the accrual method for reporting income. 3. If inventory is necessary to account for income, and the business does not qualify as a small business for the rules for the cash method, the business must use the accrual method for purchases and sales.. but the cash method can be used for other income and expense items

Question 34

Changing accounting methods – prior approval from the IRS is required for

Answer 34

1. Changes from cash to accrual or vice versa, unless required by law. 2. Changes in the method used to value inventory. 3. Changes in the method of depreciation or amortization. Must file form 3115, application for change in accounting method, to request a change

Question 35

Changing accounting methods – prior IRS consent is not required for the following changes

Answer 35

1. Making an adjustment in the useful life of a depreciable or amortize asset. 2. Correcting a math error or an error in figuring tax liability. 3. A change in accounting method when the changes required by tax law – example when a businesses average gross receipts exceeds $30 million – becomes an automatic change.

Question 36

Depreciation errors – how are they corrected?

Answer 36

Corrected by either filing an amended tax return or filing a change in accounting method form 3115 And amended return is permitted to correct an error that occurred on only one tax return not multiple years

Question 37

When an accounting method change is mandated by law and does not require prior sent from the IRS… filing requirement

Answer 37

The form 3115 is still filed in the first affected that contains the change

Question 38

Changing accounting methods – unclaimed depreciation

Answer 38

For closed as well as open years, unclaimed depreciation is allowed through a section 481 a adjustment that reduces income in the year of change If the entire adjustment is less than $25,000, a minimus rule permits, taxpayers to take 100% of the amount into account in the year of change

Question 39

Inventories – taxpayers that meet the $30 million gross receipts test in 2024

Answer 39

Not required to account for inventories, but may use a method of accounting for inventories that either Treat inventories as non-incidental, materials and supplies, or Conform to the taxpayers financial accounting, treatment of inventories

Question 40

Cash basis, taxpayer may still not deduct items for sale to customers from inventory until the later of

Answer 40

When they are sold Or When they are paid for

Question 41

UNICAP

Answer 41

The uniform capitalization rules

Question 42

UNICAP - Businesses that meet the $30 million gross receipts test

Answer 42

No longer required to apply the uniform capitalization rules But does not apply to businesses that are engaged in the production of real property, for example, a real estate developer that builds houses for resale

Question 43

Business is subject to the UNICAP rules – inventory should include all of the following

Answer 43

Merchandise or stock in trade Raw materials, work in process, finished products Supplies that physically become a part of items for sale – labels, stickers, boxes, exterior, packaging, etc. Purchased merchandise if the title has passed to the taxpayer – even if still in transit Goods under contract for sale that have not yet been applied to the contract Goods out on consignment Goods held for sale in display rooms Intangible cost – examples include film or video production

Question 44

The following items are never included in inventory

Answer 44

Good the business has sold if the legal title or ownership has passed to the buyer Goods consigned to the business, but not owned by the business Ordered for future delivery, if the business does not have the legal title Land, buildings, and depreciable equipment that are used in the business are never included in the calculation of inventory

Question 45

Certain types of businesses are not subject to UNICAP regardless of their gross receipts, including

Answer 45

Sellers of personal use or non-business property – such as a hobby activity Research in experimental, expenditures and marketing or advertising cost Intangible, drilling, and development cost of oil and gas or geothermal Wells Timber raised, harvested or grown, and the underlying land Qualified, creative expenses, incurred as self-employed writers, musicians, or artist Loan originations Warranty cost, and product liability cost Property provided to customers in connection with providing services – property must be minimus and not be included in inventory in the hands of the service provider (example is a vet selling pet food)

Question 46

Gross profit equals

Answer 46

Gross receipts minus cost of goods sold

Question 47

Cost of good sold equals

Answer 47

Beginning inventory plus purchases in the current period minus ending inventory Cost of goods available minus any ending inventory

Question 48

What is included in the calculation of cost of good sold

Answer 48

Material used for production Direct labor cost Manufacturing overhead – think electricity, equipment, depreciation, and rent for a factory or storage facility Cost of merchandise

Question 49

Shipping terms and transfer of ownership

Answer 49

Shipping terms dictate when taxpayer must take an item out of inventory and recognize income from a sale Terms indicate the point which the title or ownership of goods transfers from seller to buyer

Question 50

FOB destination

Answer 50

Title passes to the buyer at the point of destination – when goods arrive at the buyers location

Question 51

FOB shipping point

Answer 51

Title passes to the buyer at the point of shipment – when the goods leave the sellers premises Also called FOB origin

Question 52

Common inventory methods

Answer 52

Methods used to assign costs to the items in inventory include Specific identification method Average cost method FIFO LIFO LIFO and FIFO are the two most common

Question 53

IRS requirements for inventory methods

Answer 53

The IRS does not require a specific inventory method But does require permission if the business leader decides to switch from one inventory method to another To change an inventory method – filing form 3115 to get permission

Question 54

Average cost method

Answer 54

Used by businesses that carry a large number of inexpensive items – difficult to track individually Formula for figuring average inventory cost First – calculate average unit cost = cost of units purchased or manufactured / total quantity of units Second – calculate aggregate inventory cost = average unit cost x units in current inventory

Question 55

FIFO - results in what type of ending inventory? What types of businesses use this method?

Answer 55

In an economy with rising prices or inflation, the use of FIFO will assign a higher value to ending inventory than other methods Results ANA lower cost of sales and higher taxable income Used commonly by businesses that sell perishable items like grocery stores

Question 56

Inventory requirement for stock sales - IRS

Answer 56

When the buyer cannot identify which shares they sold And the shares acquired were at different times or at different prices The IRS requires the use of the FIFO method - the sale is allocated to the shares that were purchased earliest

Question 57

What is the result of using the LIFO method?

Answer 57

Since the price of goods, labor, and materials generally rise over time This method results in a lower value to inventory on hand And higher amounts recorded as the cost of sales with a lower taxable income This method is preferred by most businesses to get the lower taxable income

Question 58

What are the differences between FIFO and LIFO

Answer 58

Inflation - rising prices * FIFO has higher value of inventory * FIFO HAS LOWER COST OF GOOD SOLD DEFLATION – FALLING PRICES * FIFO has a lower value of inventory * FIFO has higher cost of good sold

Question 59

Inventory methods commonly used in industries where inventory loses value quickly

Answer 59

The cost method Lower of cost or market The retail method Commonly used for retailers of fashion goods, seasonal goods, or technological goods

Question 60

Which inventory method results in reduced taxes – with inflation

Answer 60

LIFO

Question 61

The cost method * merch on hand at beginning of year * merch purchased during the year * merch produced during the year

Answer 61

All direct and indirect cost of producing and purchasing the inventory are included in the valuation of the inventory Merchandise on hand at the beginning of the year – cost means the ending inventory cost of the goods at the end of the proceeding near Merchandise purchased during the year – cost means the invoice price minus discounts, transportation, or other charges incurred in acquiring the goods. May also include cost that must be capitalized. Merchandise produced during the year – cost means all direct and indirect cost, including those that have to be capitalized under UNICAP

Question 62

The lower of cost or market method

Answer 62

Commonly used for inventory that will lose value quickly, such as seasonal clothing, or pharmaceuticals, which lose value the longer they are held in the business Potentially because they cannot be sold to customers once they are expired

Question 63

The lower of cost or market method cannot be used in conjunction with what other method

Answer 63

LIFO

Question 64

Retail inventory method

Answer 64

Only provides an estimate – it is not wholly accurate. Business would still need to perform a physical inventory at reasonable intervals. Used for certain business types, like multi store retailers across multiple locations First – need to determine average markup rate = cost / retail price Ending inventory = starting inventory + purchases - (sales x markup %)

Question 65

Inventory shrinkage

Answer 65

Term for lost, stolen, or damaged inventory Shrinkage reduces a businesses ending inventory and thus increases COGS Sales do not affect the shrinkage calculation

Question 66

Casualty or theft loss of inventory – two options to record the loss

Answer 66

Adjust its cost of good sold Or record the loss separately as a casualty or theft loss If deducted separately – must eliminate the affected inventory items from the CO GS by making a downward adjustment to opening inventory or purchases. Must avoid counting the last twice. Need to be deducted in the year of discovery If expecting insurance reimbursement – should not claim a loss to the extent it has a reasonable prospective recovery