EA SEE2 A. Accounting Periods

Which of the following dates would not be considered the end of a tax year? A. April 15, 2014. B. September 30, 2014. C. December 31, 2014. D. The last Friday in June.

Answer (A) is correct. A calendar year is a period of 12 months ending on December 31. A fiscal year is a period of 12 months ending on the last day of any month other than December, or a 52- or 53-week tax year. A fiscal year will be recognized only if it is established as the taxpayer's annual accounting period and only if the books are kept in accord with it. The taxpayer may elect to use a fiscal tax year that varies from 52 to 53 weeks if such period always ends on the same day of the week, either the last such day in a calendar month or the closest such day to the last day of a calendar month. (Publication 538.)

In order to adopt a fiscal tax year on its first federal income tax return, the taxpayer must A. Attach a completed Form 1128 to his or her fiscal-year-basis income tax return. B. Maintain books and records and report income and expenses using that tax year. C. File a short-period return. D. Get IRS approval.

Answer (B) is correct. Permission from the IRS is generally not needed to place a taxpayer's first tax year on either a calendar- or a fiscal-year basis. A taxpayer's first tax year is selected on the initial return. However, in order to adopt a fiscal year, the new taxpayer must adopt that year on the books and records before the due date for filing the return for that year (not including extensions).

Which of the following would not be an acceptable tax year? A. A 52- or 53-week tax year. B. A tax year consisting of 12 consecutive months ending on the last day of the month. C. A short tax year that occurs because a business changes to the accrual method of accounting. D. A short tax year that occurs because a business changes its accounting period.

Answer (C) is correct. A return for a period of less than 12 months is required when either a taxpayer's annual accounting period changes or a taxpayer has been in existence for only part of a tax year. Thus, a short tax year cannot occur because a business changes to the accrual method of accounting.

Which of the following must adopt the calendar year as their tax year? A. An S corporation. B. A partnership. C. A taxpayer who keeps no books or records. D. A tax shelter.

Answer (C) is correct. The taxpayer's tax year must be the calendar year if the taxpayer keeps no books, has no annual accounting period, or has an accounting period other than a calendar year that does not qualify as a fiscal year.

Mr. Jones has an adjusted gross income of $40,000 and itemized deductions of $16,000 for the 6-month period from January 1 through June 30, 2014. He is allowed to claim exemptions of $15,600 (four people). Mr. Jones received an approved change to his tax year, and he must file a short tax year return. What is the taxable income amount that Mr. Jones must use to compute his short year return? A. $16,200 B. $24,000 C. $8,400 D. $32,400

Answer (D) is correct. Publication 538 states, "Income tax for a short tax year must be annualized. . . . An individual must figure income tax for the short tax year as follows. Determine your adjusted gross income for the short tax year and then subtract your actual itemized deductions for the short tax year. (You must itemize deductions when you file a short-period tax return.) Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12. Subtract the amount in (2) from the amount in (1). This is your modified taxable income. Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. This is your annualized income." Therefore, the taxable amount of income he must report on his short year tax return is $32,400. 1. $40,000 - $16,000 = $24,000 2. $15,600 × 6 ÷ 12 = $ 7,800 3. $24,000 - $7,800 = $16,200 4. $16,200 × 12 ÷ 6 = $32,400