Accounting Methods and Periods- Individuals Flashcards
IF a cash basis taxpayer has A/R, what is the basis?
It is always zero basis
Accrued basis exceptions- Unearned income is usually recognized in what year?
In the year the cash is received
If a taxpayer has service income which isn’t been performed yet, can they defer?
Yes, but it has to be reported in the next year if the service to be provided within the following year
May a taxpayer elect to defer recognition of an advance payment for goods?
Yes, only if they are doing the same for tax and financial reporting purposes.
When is prepaid rent taxed?
When received
Lease deposits- if they are refundable then they don’t have to include, if it is nonrefundable then it is taxed.
The fair value of leasehold improvements is income when?
When it is made in lieu of rent
IF a business with inventory what is the general method that they should use?
Generally it is accrual method to report purchases and sales
For taxpayers who annual gross receipts do not $1 million, they can use what method?
Cash method for all accounts
Can LIFO be used for taxes?
Yes only if it is used for financial reporting.
What is the Uniform Capitalization Method?
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
What indirect costs need to be capitalized for tax purposes?
Who do the rules not apply to?
Virtually all indirect production costs must be capitalized
Do not apply to small property dealers (those with $10 million or less in gross receipts)
What costs would be included in Uniform Cap method?
- Storage costs if off-site
- Quality control
- Taes (except income taxes)
- Utilities, repaired, rent, depreciation
What costs are not included in the Uniform Cap Method?
Marketing and selling research advertising distributions general and admin expenses
Changes in accounting method that is a voluntary change, the accounting method is spread over how many years?
4 years
If the adjustment is less than $25,000 the taxpayer can include all income in the year of change
If the change in accounting method is due to an IRS examination, any positive adjustment to income is included in what tax year?
The earliest tax year under examination
What is the formula for recognizing the gain under and installment sale? (MEMORIZE)
Cash Received For That Year X (Gross Profit/Contract Price)
Can dealers use the installment method?
NO!
If the installment note is sold to a third party, when is the gain recognized?
The remainder of the gain will be recognized immediately
If you have an installment sale on 1245 property, how does that impact the gain recognized over the coming years?
1245- Ordinary Income portion is recognized in YR1.
Gross profit percentage is reduced by the YR1 ordinary income
For cash basis taxpayer has prepaid expenses, can they deduct the expense immediately?
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
Capitalization rules for expensing include:
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.
