Chapter 9 - Timing of Income Flashcards
What determines when to report income?
your accounting method
*The IRS can prescribe an accounting method
What is the rule for cash method in terms of income
income is included in gross income when income is received
What are features of the cash method?
- Property or services must have a fair market value
-A/R not included
-N/R are included at FMV when the note is received
-not available to all entities - constructive receipt doctrine
What is constructive receipt
income is constructively received when the amount is readily available to the taxpayer and the taxpayer’s actual receipt is not subject to substantial limitations or restrictions
- you can’t make someone give you money later if is readily available unless its in a contract or something
if you receive cash that is under an obligation to repay is it included in gross income
no, because you have to pay it back, so it’s not income
ex: security deposit
is return on capital taxable income
no only the gain is taxed the return on capital is not income
What is OID (original issue discount)
The difference between the amount due at maturity and the amount of the original loan is considered interest income
*think of effective interest method table and the interest income part of the J.E
what is the accounting rules when it comes to the cash basis for OID
under a cash basis the interest income from a discount bond is amortized and recognized throughout the life of the bond
- think of effective interest method amortization tables and the interest income part
what is the difference between market discount and original issue discount
OID happen when you knowingly buy a bond at a discount and market discount happens when market rates change after you bought the bond
- market rate no special rule and you can just defer income until maturity but there is for OID
Under the accrual method when is income recognized
income in included in the year it is earned regardless of when it is collected
when is income earned?
when the all events test is passed and the amount can be determined with reasonable accuracy
what is the all events test
title to the property passes to the buyer or the services are performed for the customer
Under the accrual basis what is the tax rules for prepaid income
rent and interest
prepayments for rent and interest: always recognize when received not earned
Under the accrual basis what is the tax rules for prepaid income
all goods and services
full inclusion method - include in the year of receipt
deferral method: can defer recognition one-year past year of receipt
- example you get 4 years of prepayment you can recognize this years income from the services and then the next year you recognize the rest of the years
