Chapter I 11: Accounting Periods and Methods

S-Corp Tax Year

S-Corp are required to adopt the calendar year unless the corporation has a business purpose for electing a fiscal year.

Completed Contract Method

Income is recognized the year the contract is completed.

Economic Performance Test

Occurs when property or services are actually provided by the other party.

Imputed Interest

Section 483 imputes the interest in a deferred payment contract where little or no interest rate is provided.

Can a corporation elect any accounting method?

The accounting method used to compute taxable income must be the same being used as those used in the taxpayer's books and records.

A corporation is incorporated on Dec. 15th, 2017 and has chosen to elect the calendar year as its taxable year. When does the first taxable year occur?

The first taxable year occurs from Dec. 15-Dec. 31st, 2017

C-Corp Tax Year

A C-Corp can elect any fiscal year.

The types of accounting methods

-Accrual -Cash -Hybrid

All Events Test

-All events have occurred to fix the right to receive income. -Amounts Can be determined with resonable accuracy.

Criteria electing the cash method of accounting:

-Gross receipts <$1 million if they have COGS -If no COGS=> gross receipts <$10 million for individuals and certain personal service businesses, $5 million for corporations and partnerships.

Under what circumstances an a taxpayer use the completed contact method?

-Home construction contracts. -Smaller companies (those with gross receipts of less than $10 million for the previous three years) instead of the percentage complete method. It will be increased to $25 million for 2018.

Do accounting methods determine the amount of income reported by a taxpayer?

-In the long run (over the life of the corporation) income reported will be the same regardless of accounting method. -Income reported in a given year may differ depending on accounting method.

Percentage Complete Method

-Income and expenses reported in each year of contract based on estimated percentage of work completed. -Look back interest may be applicable to this.

Accrual Method Income

-Income is recognized when earned. -All events test must be passed.

Instances in which a short period can occur.

-Initial year -The final year -A change in accounting periods

Costs of Inventory

-Inventories may be valued at either cost or LCM. -Taxpayers may use LIFO but may not use LCM. -Costs of inventory must be factored into the cost of inventory (UNICAP).

Cash Method of Accounting

-Property is valued at FMV. -Must capitalize and depreciate fixed assets.

Fiscal Year

A 12 month period that land on the last day of any other month other than December.

Computation of Installment Sales

1. Compute gross profit. 2. Determine contract price. 3. Compute gross profit % (gross profit/contract price). 4. Compute gain to be reported (Proceeds x Gross Proft %).

When are expenses deductible by a cash method taxpayer?

A deduction can be taken when the expenses are paid.

Installment Sales

A disposition of property in which at least one payment is received after the close of the taxable the sale occurred. -Not available on the sale of inventory and marketable securities. -Gain on the sale can be deferred to the payment periods

Accounting Period

A period that on the basis of which a tazpayer keeps its books and records and computes income and expenses for the period.

Accounting Methods

A system of rules that is used to determine the year in which in come and expenses are reported for tax purposes.

Hybrid Method

An accrual method for sales and COGS but use the cash method for other income and expenses.

A deduction can be made only if:

Both all events test and economic performance test are met.

Partnership Tax Year

Must use the same tax year as the partners who own the majority of the partnership income and capital(>50%). -If they don't have the same fiscal year partners must use the tax year of its principal partners. -If the partners don't have the same tax year, they must elect the year in which the least aggregate deffereal of income to the partners.

Can a taxpayer elect any accounting period?

No, a taxpayer must elect a tax year that coincides with the taxpayer's books and records.

Can an accrual method taxpayer deduct estimated expenses?

No, the all events and economic performance tests must be met.

UNICAP

Under UNICAP the following must be included in inventory: -Factory repairs and maintenance, utilities, rent, insurance, and depreciation. -Factory admin and officers' office salaries -Taxes (other than income tax) -Quality control and inspection -Rework, scrap, and spoilage -Current and past service costs of pension and profit sharing plans -Service support such as purchasing, payroll, and warehousing costs.

Is a cash method payer subject to the same rules for depreciable assets as accrual payers?

Yes.