Subchapter E 441-483 Flashcards
Part II Methods of Accounting
446-475
General Rule for Methods of Accounting
446
Taxable income computed using method taxpayer uses for keeping their books.
If no method is used or method used does not clearly reflect income, Secretary will choose a method that clearly reflects income.
Acceptable methods include the cash method, accrual method, other methods permitted by this chapter, and a combination of these methods as approved by the secretary.
Taxpayer must receive consent of Secretary to change methods.
Cash Method Basics
Recognize income on receipt of cash, property, or services. Constructive receipt occurs when property is available on demand without substantial limitations.
Recognize deduction when a payment is made. Taxpayer may not deduct an expense that provides a benefit that extends substantially beyond the end of the year.
Accrual Method Basics
Recognize income when all the events have occurred that fix the right to receive income and the amount of the income is determinable with reasonable accuracy (the “all events” test).
Entitled to deductions when all events have occurred that establish the fact of liability and the amount can be determined with reasonable accuracy. (Except for reserves)
Method of Accounting for Corporations Engaged in Farming
447
Limitation on Use of Cash Method of Accounting
448
Cash method cannot be used by C corporations, partnerships with C corps as partners, or “tax shelters”.
Exceptions include farming businesses, qualified personal services corporations, and entities that meet a “gross receipts test.” (Basically average under 25 mill in income)
General Rule for Taxable Year of Inclusion
451
Income included in gross income of the taxpayer in the year income is received unless such property is properly accounted for in different period.
For accrual taxpayer, income is recognized no later than year it is recorded in “applicable financial statements.”
Advance payments included when received by accrual taxpayer, but there are a bunch of exceptions.
Other misc. rules
Installment Method
453
Special Rules for Nondealers
453A
Gain or Loss on Disposition of Installment Obligations
453B
Obligations Issued at Discount
454
Prepaid Subscription Income
455
Amounts prepaid for multi-year subscriptions may be deferred over period of subscription.
Prepaid Due Income of Certain Membership Organizations
456
Amounts prepaid for multi-year memberships may be deferred over period of membership.
Deferred Compensation Plans of State and Local Governments and Tax-Exempt Organizations
457
Nonqualified Deferred Compensation From Certain Tax Indifferent Parties
457A
Magazines, Paperbacks, and Records Returned After the Close of the Taxable Year
458
