Accounting Methods and Periods- Individuals

Question 1

IF a cash basis taxpayer has A/R, what is the basis?

Answer 1

It is always zero basis

Question 2

Accrued basis exceptions- Unearned income is usually recognized in what year?

Answer 2

In the year the cash is received

Question 3

If a taxpayer has service income which isn’t been performed yet, can they defer?

Answer 3

Yes, but it has to be reported in the next year if the service to be provided within the following year

Question 4

May a taxpayer elect to defer recognition of an advance payment for goods?

Answer 4

Yes, only if they are doing the same for tax and financial reporting purposes.

Question 5

When is prepaid rent taxed?

Answer 5

When received

Lease deposits- if they are refundable then they don’t have to include, if it is nonrefundable then it is taxed.

Question 6

The fair value of leasehold improvements is income when?

Answer 6

When it is made in lieu of rent

Question 7

IF a business with inventory what is the general method that they should use?

Answer 7

Generally it is accrual method to report purchases and sales

Question 8

For taxpayers who annual gross receipts do not $1 million, they can use what method?

Answer 8

Cash method for all accounts

Question 9

Can LIFO be used for taxes?

Answer 9

Yes only if it is used for financial reporting.

Question 10

What is the Uniform Capitalization Method?

Answer 10

These are requirements to ensure companies are capitalizing on inventory costs rather than expensing in the period incurred.

These costs include directing indirect costs allocable to property they produce

Question 11

What indirect costs need to be capitalized for tax purposes?

Who do the rules not apply to?

Answer 11

Virtually all indirect production costs must be capitalized

Do not apply to small property dealers (those with $10 million or less in gross receipts)

Question 12

What costs would be included in Uniform Cap method?

Answer 12

• Storage costs if off-site
• Quality control
• Taes (except income taxes)
• Utilities, repaired, rent, depreciation

Question 13

What costs are not included in the Uniform Cap Method?

Answer 13

Marketing and selling 
research 
advertising 
distributions 
general and admin expenses

Question 14

Changes in accounting method that is a voluntary change, the accounting method is spread over how many years?

Answer 14

4 years

If the adjustment is less than $25,000 the taxpayer can include all income in the year of change

Question 15

If the change in accounting method is due to an IRS examination, any positive adjustment to income is included in what tax year?

Answer 15

The earliest tax year under examination

Question 16

What is the formula for recognizing the gain under and installment sale? (MEMORIZE)

Answer 16

Cash Received For That Year X (Gross Profit/Contract Price)

Question 17

Can dealers use the installment method?

Answer 17

NO!

Question 18

If the installment note is sold to a third party, when is the gain recognized?

Answer 18

The remainder of the gain will be recognized immediately

Question 19

If you have an installment sale on 1245 property, how does that impact the gain recognized over the coming years?

Answer 19

1245- Ordinary Income portion is recognized in YR1.

Gross profit percentage is reduced by the YR1 ordinary income

Question 20

For cash basis taxpayer has prepaid expenses, can they deduct the expense immediately?

Answer 20

Only if the benefits do not extend beyond

• 12 months after the first begin
• The end of the year after the year in which the payment was made

IF you don’t meet that, it is amortized over the life

Interest always have to be amortized

Question 21

Capitalization rules for expensing include:

Answer 21

If the cost benefits extend beyond one year, generally they have to be capitalized and expensed over the life of the benefits.

Anything under $5,000 can be expensed immediately. They need to have written procedures in place for expensing or has a useful life of 12 months or less.