REG 1 - Gross Income: Part 2 Flashcards
What accounting method is used for long-term contracts? What is the exception?
Long-term contracts must use percentage-of-completion method.
Exception: completed contract method can be used if”
1) Small contractor - annual gross receipts don’t exceed $10 million for the three years preceding the tax year
2) Home construction contractors
Define the production period of long-term contracts?
Start date
- The date at which construction costs incur
End date
- The date when the contract is complete
What is the calculation of recognizing income for percentage-of-completion method?
Cost Incurred / Total expected costs = Work done / total work = % of income earned
How is personal property qualified as a long-term contract?
1) It must be completed within the year it was stated
2) Must be for the manufacture of a “unique” item
How do you change accounting methods for long-term contracts?
The permission of IRS is required to change accounting methods for long-term contracts.
How is inventory accounted for in cash basis Schedule F?
Under cash basis for Schedule F filers, inventories of produce, livestock, etc are NOT considered - expense inventory.
How is inventory accounted for in accrual basis Schedule F?
Under accrual basis for Schedule F filers, inventories of produce, livestock, etc must be used and maintained and considered - NOT expensed.
Define farm income averaging?
Allows taxpayers to lower their tax liability during a year in which income is higher by spreading it out the past THREE YEARS.
What is the basic formula for rental income or loss?
Gross rental income \+ Prepaid rental income (nonrefundable deposits) \+ Rent cancellation payment \+ Improvement-in-lieu of rent - Rental expenses = Net rental income or net rental loss
What is the treatment of renting out residence(home) for less than 15 days?
When “home” residence is rented for FEWER THAN 15 DAYS, then rental income is excluded form income.
What is the treatment of renting out residence(home) for more than 15 days?
When “home” residence is rented for MORE THAN 15 DAYS:
1) Expenses must be prorated between personal and rental
2) NO rental loss allowed
What are the two basic tax strategies of tax planning?
1) Defer taxable income (e.g. postpone - don’t tax income this year, but tax it next year)
2) Accelerate tax deductions (e.g. if you’re a cash basis tax payer - pay bill in December to get expense, don’t wait until next year to get deduction.
