Accounting Methods Flashcards
Cash Method
Reported when they are received or paid (need not be in the form of cash)
If receipt of payment is available without substantial restrictions- constructive receipt
Prepaid expense- not deductible until the year to which they properly relate
Paid in advance- includable in year receive
Accrual
Includible when: events have occurred that fix the right to be received and the amount can be determined
Match income and expense in the same year
Installment
Property is sold and payment is made on a deferred basis- gain is reported as each payment is received
Relief- NOL
if TP trade or bus deductions exceed income the NOL may be used as a deduction against the income from the 2 preceding and 20 succeeding years until fully absorbed
Realization
Gains and losses are given tax effect when they are realized
Occurs- at the time an asset is sold or disposed of
AR- AB= G/L
AR= Cash + FMV
Basis
Cost to TP
Adjustments may be made for capital improvements or depreciation
Basis in gifts
Retains basis as was in the donor’s hands
If loss use FMV at date of transfer
Inheritance basis
FMV at the death of decedent or
FMV 6 month after death; value at time of disposition if disposed within the 6 months
Non Recognition events
Like kind exchanges- if other property received as well (cash) transaction produces recognized gain only of cash; Basis- is the same unless other property is received- then basis decreases by that amount
Involuntary conversions- theft, condemnation, destruction- recognized if not reinvested in 2 years (gain of unreinvested amount); Basis- same as property converted - $ received that was not spent in accordance with the involuntary conversion rule + gain or - losses
Wash sale- no deduction is allowed for losses on sale of stock if the TP acquires substantially identical property within 30 days before or after the loss transaction
Transactions to related persons- no deduction for loss to family
Capital Gains and Losses
capital asset is sold or exchange
Capital assets
All property except:
Inventory; depreciable property; copyright; accounts (receivables); supplies
1231 Property
Depreciable property and real property (e.g. - buildings and equipment) used in a trade or business and held for more than one year
If loss- ordinary
If gain- capital gains unless ordinary losses in the preceding 5 years.
Ex: report loss fo 20K in year 1 but 10K gain in year 2- all ordinary income to recapture the loss. Once the gain exceeds the recaptured loss- reported as a long term capital gain
Casualty and theft losses- take loss from casualty at ordinary loss to deduct from ordinary income and can keep gains in capital gains rate
1 year provision can be “tacked on to” previous owner
15% capital gains rate; 28% collectables
Capital losses
loss on the sale of a capital asset-
Losses can be deducted against other income up to 3K per year. If more than 3K- it an carry over to the next years indefinitely
