Accounting Methods, Inventory Valuations, Depreciation, Section 179

Question 1

Specific identification

Answer 1

Can only be used when the firm is able to differentiate inventory by purchase lot. The major advantage is that both inventory valuation and the amount charged to cost of good sold are accurate.

Question 2

Cash method

Answer 2

Recognizes expenses when they are actually paid and revenue when they are actually or constructively received. Tax return is always cash basis.

Question 3

In a rising price environment will profit be higher under FIFO or LIFO

Answer 3

FIFO

Question 4

In a falling price environment will profit be higher under FIFO or LIFO

Answer 4

LIFO

Question 5

Accrual method; revenue

Answer 5

Revenue is recognized when the right to receive it exist (for example accounts receivable) not when the payment is received

Question 6

Accrual method; expenses

Answer 6

Recognized when liability can be established not when payment is made

Question 7

Three prong test for expenses under accrual method

Answer 7

1. Determine liability exists - contingent expenses, not allowed.
2. Amount estimated with reasonable accuracy.
3. Economic performance (work done.)

Question 8

Two prong test for revenue under accrual method

Answer 8

1. Right to receive income is established and not contingent upon a future event.
2. Amount can be estimated with reasonable accuracy.

Question 9

Constructive receipt

Answer 9

Occurs when funds are available without restriction

Question 10

When must accrual method be used?

Answer 10

Corporations must use use the accrual method if average annual gross receipts for the three taxable years ending with the prior taxable year exceeds 30 million and when inventory is necessary to account for income, then accrual method must be used for purchases and sales.

Question 11

When must accrual method be used?

Answer 11

Corporations must use use the accrual method if average annual gross receipts for the three taxable years enfing with the prior taxable year exceeds 30 million and when inventory is necessary to account for income, then accrual method must be used for purchases and sales.

Question 12

Hybrid method

Answer 12

Taxpayer would prefer to use the cash method, but have inventory as a component of their business. Accrual method will be used for inventory business and sales of inventory, cash method may still be used for service portion of business

Question 13

What requirements must property meet to be depreciable?

Answer 13

• It must be property owned by the taxpayer
• It must be used in business or income producing activity
• It must have a determinable useful life.
• It must be expected to last more than one year

Question 14

Useful life for common depreciable assets

Answer 14

• Auto 5 years
• Computer 5 years
• Heavy machinery 7 years
• Office furniture 7 years
• Residential real estate 27.5 years
• Non-residential real estate 39 years

Question 15

When does depreciation start and stop?

Answer 15

Depreciation starts when the property is placed in service for use in trade or business or to produce income. Depreciation stops when the cost has been fully recovered or when it’s retired from service, which ever happens first.

Question 16

Accelerated depreciation

Answer 16

Enables taxpayer to have more depreciation in the early years and less at the end of the assets useful life. This increases cash flow. MACRS stands for modified accelerated cost recovery system.

Question 17

Straight line depreciation

Answer 17

Purchase price of an asset - salvage value / by useful life of an asset

Question 18

Half or midyear convention

Answer 18

Only half of the full amount of the depreciation can be taken in the yea the asset was put into service. Another half is taken in the last year.

Question 19

Section 179 overview

Answer 19

Allows businesses to deduct the full cost of qualifying capital assets immediately. The deduction limit is up to 1.2 million of the acquisition cost, which can be deducted as an ordinary expense in the year of purchase.

Question 20

Non-qualifying property for section 179

Answer 20

• Real property: land, buildings, and land improvements
• Air-conditioning and heating
• Property used outside the US
• Property used to furnish lodging
• Property acquired by gift or inheritance - Property purchased from related parties

Question 21

Qualifying property for section 179

Answer 21

• Equipment purchase for business use
• Tangible personal property used in business
• Computers and off the shelf software
• Office furniture and equipment
• Certain business vehicles

Question 22

Section 179 phase out limit

Answer 22

The 1.2 million max deduction is reduced dollar dollar if capital spending exceeds 3.05 million

Question 23

Limitations on section 179 deduction

Answer 23

Limited to the firms net profit excluding 179 expense, any excess 179 expense can be carried over to the next year’s taxes

Question 24

Section 179 in sole prop

Answer 24

A sole proprietor can aggregate net business profit with unrelated W-2 wages for the purpose of calculating 179 expense deduction

Question 25

In a liquidation of a C Corp the event is taxable to

Answer 25

The corporation and the shareholders

Question 26

In a liquidation of a C Corp. the event is taxable to

Answer 26

The corporation and the shareholders

Question 27

In liquidation of an S Corp. the event is taxable to

Answer 27

The shareholders as S corpse are pass-through entities

Question 28

LLC members and self-employment tax

Answer 28

Members of an LLC are subject to the self-employment tax if the LLC is taxed as a partnership and the members are actively involved in the business. If the LLC elects to be tax as an a corporation members may not be subject to self-employment tax on distributions, but they would still owe payroll taxes on wages received as employees. This does not apply to passive members who are only investors.