Accounting Methods and Periods - Corporations Flashcards
Tax year for C Corporations?
Any taxable year.
Tax year for Personal service corporations?
Must adopt a calendar year generally.
Tax year for partnership?
Generally must be the same as that used by its partners owning more than 50% of partnership income and capital.
Tax year for S corporations?
Generally must adopt a calendar year.
Tax year for estate?
Any taxable year as long as it ends at the end of the month.
Tax year for trust (other than charitable and tax-exempt trusts)?
Must adopt a calendar year.
For those entities with flexibility, what test must they meet to change tax year?
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.
Changing tax year: what form must be filed? By when?
Form 1128: Application for change in accounting period.
By the 15th day of the second month after the close of a short period.
Which entities can’t use cash method of accounting?
- Regular C corporations.
- Partnership that have regular C corporations as partners.
- Any entities that meet the definition of tax shelters.
What is exceptions to the general cash method accounting entities?
- 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.
Accounting method: when can tax shelter use cash method?
Never.
Inventory accounting: In general, which accounting method must businesses with inventories use? Exception?
- 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.
Inventory accounting: What is the cost accounting method for inventory?
*FIFO always ok. LIFO can be used if it is also used for FS.
Inventory accounting: how is the inventory valued?
At lower of cost or market (replacement cost or reproduction cost).
If LIFO is used, must be cost.
If a corporation files a short-yr return for a period less than 12 months, how is the tax liability for the period determined?
- Must annualize the income; the income for the period x (12 months / short period).
- Tax liability is computed on the amount for the full 12 months.
- That amount is then multiplied by (short period / 12 months) to prorate for the short tax yr.
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?
- Short period is July 1 to Sept 30.
30,000 x (12/3) = 120,000 - $120,000 x (use ratio from corporate tax table) = $30,050.
- 30,050 x (3/12) = $7,513.
Long term contract: Which method must be used to recognize income for production projects that take more than 1 yr to complete?
The percentage of completion method must be used.
What does competed contract method do? Can this method be used for tax purpose in general? Exception?
- 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.
How is the selection of an accounting method for tax purpose by a newly incorporated corporation made?
Made on the initial tax return by using the method.