Accounting Methods and Periods - Corporations

Question 1

Tax year for C Corporations?

Answer 1

Any taxable year.

Question 2

Tax year for Personal service corporations?

Answer 2

Must adopt a calendar year generally.

Question 3

Tax year for partnership?

Answer 3

Generally must be the same as that used by its partners owning more than 50% of partnership income and capital.

Question 4

Tax year for S corporations?

Answer 4

Generally must adopt a calendar year.

Question 5

Tax year for estate?

Answer 5

Any taxable year as long as it ends at the end of the month.

Question 6

Tax year for trust (other than charitable and tax-exempt trusts)?

Answer 6

Must adopt a calendar year.

Question 7

For those entities with flexibility, what test must they meet to change tax year?

Answer 7

They must meet the business purpose test; TP receives at least 25% of its gross receipts in the last 2 months of the selected yr for 3 consecutive years.

Question 8

Changing tax year: what form must be filed? By when?

Answer 8

Form 1128: Application for change in accounting period.

By the 15th day of the second month after the close of a short period.

Question 9

Which entities can’t use cash method of accounting?

Answer 9

• Regular C corporations.
• Partnership that have regular C corporations as partners.
• Any entities that meet the definition of tax shelters.

Question 10

What is exceptions to the general cash method accounting entities?

Answer 10

• Any corporation or partnership whose annual gross receipts don’t exceed $5 million - must meet the test for the previous 3 yr period. Once failed, must use the accrual method for all future tax yrs.
• Certain farming businesses
• Qualified personal service corporations.

Question 11

Accounting method: when can tax shelter use cash method?

Answer 11

Never.

Question 12

Inventory accounting: In general, which accounting method must businesses with inventories use? Exception?

Answer 12

• Accrual method at least for sales and purchases (COGS).

* If the gross receipt is less than $1 million, can use cash method for all items.

Question 13

Inventory accounting: What is the cost accounting method for inventory?

Answer 13

*FIFO always ok. LIFO can be used if it is also used for FS.

Question 14

Inventory accounting: how is the inventory valued?

Answer 14

At lower of cost or market (replacement cost or reproduction cost).
If LIFO is used, must be cost.

Question 15

If a corporation files a short-yr return for a period less than 12 months, how is the tax liability for the period determined?

Answer 15

1. Must annualize the income; the income for the period x (12 months / short period).
2. Tax liability is computed on the amount for the full 12 months.
3. That amount is then multiplied by (short period / 12 months) to prorate for the short tax yr.

Question 16

Question:
A corporation changed the end from June 30 to Sept 30. Short period ending Sept 30 income: $30,000.
Tax liability for the short tax yr?

Answer 16

1. Short period is July 1 to Sept 30.
   30,000 x (12/3) = 120,000
2. $120,000 x (use ratio from corporate tax table) = $30,050.
3. 30,050 x (3/12) = $7,513.

Question 17

Long term contract: Which method must be used to recognize income for production projects that take more than 1 yr to complete?

Answer 17

The percentage of completion method must be used.

Question 18

What does competed contract method do? Can this method be used for tax purpose in general? Exception?

Answer 18

• The gross profit from the project to be deferred until complete.
• No.
• Can be used by those with $10 million or less in average gross receipts during the preceding 3 yrs if the project is expected to last no more than 2 yrs.

Question 19

How is the selection of an accounting method for tax purpose by a newly incorporated corporation made?

Answer 19

Made on the initial tax return by using the method.