Accounting Methods: Recognition of Revenues and Expenses under Cash/Accrual/other

Question 1

Which Tax Payers are not required to use Accrual method?

Answer 1

Farming businesses
Qualified personal service corporations
Partnerships and corporations with gross receipts of not more than $5 million

Question 2

What is the general Rule of who must use Accrual

Answer 2

C corporations
Partnerships that have a C corporation partner
Tax shelters (defined in IRC Section 461(i)(3))

Question 3

Example of Organizational expenses

Answer 3

Expenses of temporary directors?????
Fees paid to a state for incorporation
Accounting and legal fees incident to organization (drafting the charter)

Question 4

For organizational expenditures incurred after October 22, 2004

Answer 4

1) taxpayers may deduct up to $5,000 in the taxable year in which the business begins
2) The $5,000 amount is reduced by the amount by which the cumulative cost of organizational expenditures exceeds $50,000
3) Any remaining organizational expenditures not deducted are amortized over a 15-year period

Question 5

The IRS allows small businesses

Answer 5

1) with average annual gross receipts of less than $1 million to use the cash method, even if they have inventories
2) The cost of items otherwise required to be inventoried are not deductible until sold

Question 6

The IRS also allows certain taxpayers with qualifying businesses

Answer 6

to use the cash method if they have average annual gross receipts under $10 million

Ineligible businesses include mining activities, manufacturing, retail and wholesale trade, and information industries

Question 7

A corporation (which is not a financial institution)

Answer 7

is required to use the direct charge-off method rather than the reserve method to calculate the bad debts

Question 8

Example of Organizational expenses

Answer 8

Expenses of temporary directors
Fees paid to a state for incorporation
Accounting and legal fees incident to organization (drafting the charter)

Question 9

A new corporation selects its accounting method

Answer 9

by selecting the appropriate box when it files its first tax return

If a different accounting method is desired later, the corporation must obtain IRS approval

Question 10

Any taxpayer (including farmers) that has inventories

Answer 10

must use the accrual basis of accounting for purchases and sales

Question 11

As long as an accrual-basis corporation pays a declared bonus within two months and 15 days after the end of the year

Answer 11

the bonus is deductible in the year declared, not the year paid

Question 12

The general rule is that when services are paid for in property (any compensation other than cash)

Answer 12

the fair market value of the property at the time of receipt must be included in income