Chapter 16

Question 1

A 12 month period ending on the last day of a month other than Decc. for the acct. period

Answer 1

Fiscal Year

Question 2

In a partnership the tax year must be the same as the tax year of?

Answer 2

The majority interest partners

Question 3

No majority partner?

P-Ship must adopt tax year same as its?

Answer 3

Principal Partners

Question 4

S-Corps & P-Ships can elect a fiscal year if:

Answer 4

• Biz purpose ( 25% of gross receipts are in the last 2 months of your choice for 3 consecutive years)
• Must not defer > 3 months of income and must pay required tax payment.

Question 5

P-Ships & S-Corps

Required tax payment calculation

Answer 5

(Previous Fiscal Yr Salary

x months left till EOY @ Fiscal EOY/12 x 36%)

• last years required tax payment

Question 6

Personal Service Corps can elect a fiscal year if:

Answer 6

• Biz purpose (25% of gross receipts in last 2 months of your choice for 3 consecutive yrs)
• must not defer > 3 months of income and must pay out the required distribution for the last months not included in the fiscal year

Question 7

How to calc PSC required distribution

Answer 7

Salary earned during fiscal year * months left to EOY at fiscal EOY/12

Question 8

IRS Requirement of Natural Biz Year

Answer 8

At least 25% of gross receipts for 12 month period must be realized in the final 2 months for 3 consecutive years

Question 9

If IRS approves change of tax year taxpayer must accept condition of NOL treatment for short year

Answer 9

Must be carried forward and cannot be carried back

(forward 20 years)

Question 10

Claim of Right Doctrine

(Basic Premise)

Answer 10

• You claimed something as income on your taxes that you didnt have rights to and have to repay it; you get a tax deduction in the year of greater benefit

(either in the year income was taxed or the year it was repaid)

Question 11

Who can use cash method?

Answer 11

• Certain entities with gross receipts > 1 million < 10 million, the most recent 3 year period. (not C Corps, Pships, tax shelters, or bizs with large % of gross receipts coming from selling goods, mining, manufacturing, and certain publishing.
• Any entity that isn’t a tax shelter & has < 5 million in gross receipts

Question 12

Who can use modified cash method?

Answer 12

any entity with gross receipts < 1million.

• can buy & sell inventory

Question 13

What Method

Income is not recognized until taxpayer actually receives or constructively recieves cash or its equivalent.

Answer 13

Cash Method

Question 14

What Method?

Item is generally included in gross income in year that is earned regardless of when income is collected

Answer 14

Accrual Method

Question 15

Who HAS to use the Accrual method?

Answer 15

• A corporation (other than an S Corp)
• A partnership with a corporate partner (that is not an S Corp)
• tax shelter

Question 16

Under the accrual method, an item is generally included in gross income for the year in which it is earned regradless of when the income is collected. An item of income is earned when:

Answer 16

• all of the events have occurred to fix the taxpayers right to receive the income

AND

• the amount of income can be reasonable accuracy

Question 17

When an accrual basis taxpayer receives prepaid income for services that will not all be earned by the end of the tax year following the tax year of receipt, generally,

Answer 17

the income that isn’t earned by the end of the year of receipt must be allocated to the following year

Question 18

What is irrelevant to an accrual basis taxpayer? Why?

Answer 18

Fair Market Value, because an accrual basis taxpayers income amount is based on right to receive