Chapter 3 - Federal Tax Process, Procedures, Accounting, and Planning Flashcards
How is a Tax Year adopted?
Whichever you choose on 1st tax return but some have a required year.
What are the 3 types of Tax Years?
Calendar Year - Ends Dec.31
Fiscal Year - Ends last day of month, except Dec.31
52/53 week year - may not end on last day of month
How is Accounting Method chosen? Describe the two types.
Chosen when first return filed but can change with IRS approval.
Cash Method - most used; cash-in=rev, cash-out=exp
Accrual Method - used by anyone carrying Inventory or using Tax Shelter; any C-corp with over $5 Mil in gross receipts (except farmers, service corporations).
Describe the Cost Method of inventory valuation.
Include all direct/indirect costs.
For goods on hand at beg. of year, cost is end. inventory value of previous year.
For goods purchased during year, cost is the Invoice Price - Discounts + Transportation/Acquiring goods charges.
For goods produced during year, Direct/Indirect costs capitalized under uniform capitalization rules.
What are methods of inventory valuation other than cost method?
FIFO (first-in, first-out); LIFO (last-in, first-out); LCM (lower of cost or market); Retail Method
Describe the Accrual Method.
Reports income in year earned and expenses in year incurred.
Matches revenue with related expenses.
Revenue can be recognized when right to receive.
When does a taxpayer report Gross Income in the Accrual Method?
The earliest of the following dates... Payment received Income due Income earned Title passed
What is Cash/Accrual methods rule for Prepaid expenses?
Taxpayer cannot deduct expenses that are paid in advance for subsequent tax years (Ex: prepaid interest, prepaid insurance premiums).
How do Cash/Accrual methods treat Bad Debt Expenses?
Accrual Method can deduct because they earned (accrued) it.
Cash Method cannot deduct because it wasn’t included in income to begin with.
How does Accrual/Cash Methods treat Tax Deductions?
Can only deduct in year paid regardless of method.
Deductible real estate taxes include any state, local or foreign taxes on real estate levied for the general public welfare.
Federal Income taxes not deductible.
Cannot deduct for local benefits/improvements to increase property value (this increases property basis) (Ex: streets, sidewalks, water mains, sewer lines, public parking facilities)
Describe a Limited Liability Company (LLC) and its tax implications.
Formed under state law; unlike partnership, members not personally liable for debts.
May be classified as a partnership, corporation or a disregarded entity separate from owner if it has only one owner.
If at least 2 members and does not file election to be corporation, will be classified as a partnership.
What are the tax implications from converting Partnership to LLC?
Will remain taxed as partnership; Nothing changes except possibly basis in partnership interest.
What is the Employee Identification Number (EIN)?
Every entity has one to determine payroll tax payments, pension payments, or for filing tax returns.
