Chapter 6 Flashcards
accounting periods
calendar, fiscal, or short-period tax years
accounting methods
accounting methods
hybrid methods
A method of accounting that involves the use of both the cash and accrual methods of accounting. The tax law permits the use of a hybrid method, provided the taxpayer’s income is clearly reflected by the method.
the primary reporting mechanism for additional taxes
Form 1040, Schedule 2
Kiddie Tax
tax on the unearned income of minor children and certain students
Nanny Tax
Payroll taxes paid by a taxpayer that employs certain household workers
net investment income tax
The ACA imposed a 3.8 percent Medicare tax on certain net investment income of individuals that have net investment income or modified adjusted gross income above the annual statutory threshold amounts.
fiscal year
An annual accounting period which does not end on December 31, a calendar year-end. An example of a fiscal year is July 1 through June 30.
Almost all individuals file tax returns using a
calendar-year accounting period
income or loss from partnerships and S corporations is passed through on
Schedule K-1
income or loss from partnerships and S corporations is passed through to
the owners and taxed on the owners’ personal tax returns
Partnerships and S corporations are not___ but are___.
taxable entities; reporting entities
Partnerships and corporations must use a specified
Fiscal Year end for tax reporting
Corporations can generally choose any
fiscal year-end for tax purposes
A corporations ___ & ___ must match the fiscal year end for taxes
books;records
Year end must always be
the last day of a month
short periods
Accounting periods less than one year
If taxpayers have a short year other than their first or last year of operations, they are required to
annualize their taxable income to calculate the tax for the short period
The tax liability is calculated at __% for the annualized period and allocated back to the short period
21%
Omoto Corporation obtains permission to change from a calendar year to a tax year ending August 31. For the short period, January 1 through August 31, 2019, the corporation’s taxable income was $40,000. What is their short period tax?
$8400
Annualization
income for period x 12/operating months.
21% x annualized income
annualized income x 12/operating months= short period tax
The tax law requires taxpayers to report taxable income using the method of accounting
regularly used by the taxpayer in keeping his or her books, provided the method clearly reflects the taxpayer’s income.
accrual method
Revenue is accounted for when it is earned. Typically, revenue is recorded before any money changes hands. Unlike the cash method, the accrual method records revenue when a product or service is delivered to a customer with the expectation that money will be paid in the future. Expenses of goods and services are recorded despite no cash being paid out yet for those expenses.
cash basis accounting
Revenue is reported on the income statement only when cash is received. Expenses are only recorded when cash is paid out. The cash method is mostly used by small businesses and for personal finances.
wages, interest and dividend income, capital gains, and personal deductions are accounted for on ___ _____ for individuals
cash basis
if an individual has schedule C income, they can report using the _____ or ___ methods
accrual/hybrid
If a taxpayer has two businesses, they can use ___
different methods of accounting for each
Tax rules require cash basis taxpayers to always use the accrual basis for
prepayments of interest
accrual basis taxpayers who receive certain types of prepaid income, such as rent in advance, must generally recognize the income on
cash basis
Taxpayers make an election to use an accounting method when
they file an initial tax return and use that method
To change methods, taxpayers must
obtain permission from the IRS.
Regular corporations, partnerships that have a regular corporation as a partner, and tax-exempt trusts with unrelated business income are generally prohibited
from using the cash method. However, this requirement does not apply to farming businesses, qualified personal service corporations, and entities with average annual gross receipts of $26 million or less
to prevent abuse of tax systems between relatives
the tax law contains provisions that govern related-party transactions
two types of transactions between related parties restricted
Sales of property at a loss
Unpaid expenses and interest
Section 267
Part of the tax code restricting relatives
When property is sold for a loss to a relative
the seller cannot claim the loss (disallowed)
When property is sold for a loss to a relative, and then that relative sells it at a gain later,
they can claim the income, less the prior relative’s disallowed loss
When property is sold for a loss to a relative, and then that relative sells it at a loss later,
no deduction for disallowed loss is available
When property is sold for a loss to a relative, and then that relative sells it at a gain less than the prior loss later,
the disallowed loss offsets the gain entirely
Ficus Corporation, an accrual basis taxpayer, is owned by Bill, an individual who uses the cash method of accounting for tax purposes. On December 31, Ficus Corporation accrues interest expense of $10,000 on a loan from Bill, but the interest is not paid to him. Ficus Corporation ____ deduct the $10,000 until the tax year in which it is actually paid to Bill.
may not
related parties under Section 267 are
Family, a greater than 50% owner of a business, two companies under the same umbrella, Trusts, corporations, some charities.
Kalmia Corporation is owned 70 percent by Jim and 30 percent by Kathy. Jim and Kathy are unrelated to each other. Since Jim owns over 50 percent of the corporation, he is deemed to be a related party to the corporation. As a result, if Jim sells property to the corporation at a loss, the loss will be _____. Since Kathy is not related to the corporation, the rules of Section 267 ___ to Kathy.
disallowed; don’t apply
