ACC250 Chapter 8 Flashcards
Regulation that allows prepaid business expenses to be currently deducted when the contract does not extend beyond 12 months and the contract period does not extend beyond the end of the tax year following the year of the payment.
12-MONTH RULE
The procedures for determining the taxable year in which a business recognizes a particular item of income or deduction thereby dictating the timing of when a taxpayer reports income and deductions.
ACCOUNTING METHOD
A fixed period in which a business reports income and deductions, generally referred to as a tax year.
ACCOUNTING PERIOD
Requires that income or expenses are recognized when (1) all events have occurred that determine or fix the right to receive the income or liability to make the payments and (2) the amount of the income or expense can be determined with reasonable acuracy.
ALL-EVENTS TEST
Bad debt expense is based on an estimate of the amount of the bad debts in accounts receivable at year-end.
ALLOWANCE METHOD
Price in transactions among unrelated taxpayers, where each transacting party negotiates for his or her own benefit.
ARM’S LENGTH AMOUNT
Losses arising from a sudden, unexpected, or unusual event such as a fire, storm, shipwreck or loss from theft.
CASUALTY LOSSES
Recognizes income from advance payments for goods by the earlier of (1) when the business would recognize the income for tax purposes if it had not received the advance payment or (2) when it recognizes the income for financial reporting purposes.
DEFERRAL METHOD
Required method for deducting bad debts for tax purposes. Businesses deduct bad debt only when the debt becomes wholly or partially worthless.
DIRECT WRITE-OFF METHOD
A deduction for businesses that manufacture goods in the United States.
DOMESTIC PRODUCTION ACTIVITIES DEDUCTION (DPAD)
The third requirement that must be met for an accrual method taxpayer to deduct an expense currently. The specific event that satisfies this test varies based on the type of expense.
ECONOMIC PERFORMANCE TEST
Accounting method that values the cost of assets sold under the assumption that the assets are sold in the order purchased.
FIFO
A year that ends the last day of a month other than December.
FISCAL YEAR
Legal entities like partnerships, limited liability companies, and S corporations that do not pay income tax. Income and losses are allocated to their owners.
FLOW-THROUGH ENTITIES
The method for accounting for advance payments for goods that requires that businesses immediately recognize advance payments as taxable income.
FULL-INCLUSION METHOD
An accounting method prohibited by tax laws.
IMPERMISSIBLE ACCOUNTING METHOD
An accounting method that values the cost of assets sold under the assumption that assets are sold in the reverse order in which they are purchased.
LIFO
Activities that involve a mixture of business and personal objectives.
MIXED-MOTIVE EXPENDITURES
Interpreted as expenses that are normal or appropriate and that is helpful or conducive to the business activity.
ORDINARY AND NECESSARY
Liabilities of accrual method businesses for which economic performance occurs when the business actually pays the liability for, among others: worker’s compensation; tort; breach of contract or violation of law; rebates and refunds; awards, prizes, and jackpots; insurance, warranties and service contracts provided to the business; and taxes.
PAYMENT LIABILITIES
Accounting method allowed under the tax law. These methods are adopted the first time a taxpayer uses the method on a tax return.
PERMISSIBLE ACCOUNTING METHOD
Expenses incurred for personal motives. Not deductible for tax purposes.
PERSONAL EXPENSES
The net income from selling or leasing property that was manufactured in the U.S.
QUALIFIED PRODUCTION ACTIVITIES INCOME (QPAI)
An expenditure is reasonable when the amount paid is not extravagant nor exorbitant.
REASONABLE IN AMOUNT
An election under economic performance to currently deduct an accrued liability if the liability is expected to persist in the future and is either not material or a current deduction better matches revenue.
RECURRING ITEM
A change to taxable income associated with a change in accounting methods.
481 ADJUSTMENT
An elective method for determining the cost of an asset sold. The taxpayer specifically chooses the assets that are to be sold.
SPECIFIC IDENTIFICATION
A fixed period in which a business reports income and deductions generally referred to as an accounting period.
TAX YEAR
Expenditures incurred while “away from home overnight,” including the cost of transportation, meals, lodging, and incidental expenses.
TRAVEL EXPENSES
Specify that inventories must be accounted for using full absorption rules to allocate the indirect costs of productive activities to inventory.
UNIFORM COST CAPITALIZATION RULES (UNICAP RULES)