Tax Accounting

Question 1

Accounting Periods

Answer 1

Calendar year - 12 mo ending on Dec 31st

Fiscal Year - 12 ending on the last day of any month besides December

Can adopt either for a 1st return

Question 2

Accounting Methods

Answer 2

1. Cash receipts and disbursements
2. Accrual Method
3. Hybrid Method

Question 3

Cash Receipts and Disbursements Method

Answer 3

Realize revenue from services in year payment received regardless of when services were actually performed.
constructive receipt

match expenses against revenue
expenses in year paid

*C Corps with average annual gross receipts of 5M+ for any of the prior 3 year tax period can’t use this method.

Question 4

Accrual Method

Answer 4

revenue realized when earnings process with goods and services is complete regardless of when payment is received.

expenses matched against revenues in the year incurs the liability for the expense

Mandatory for Inventories!

Question 5

Hybrid Method

Answer 5

combination of cash and accrual as long as reflect income and is consistently used

Question 6

Long Term Contracts

Answer 6

Use percentage complete method

any contract not completed in the year entered into.
bridges, buildings, highways…

Question 7

Installment Sales

Answer 7

When the sale consist of a note to pay over a period of time

Gain realized on sale/total contract price =Gross Profit %

That is multiplied by cash received each yr to determine gain recognized.

EXCEPTIONS
if all payments are received in year of sale
publicly traded securities
sold at a loss
sold to a related party who sells the property in 2 years of their purchase date

Question 8

Installment Sale Calculation

Answer 8

Profit
——– = gross profit %
Total contract price

Installment payment X gross profit % = gain (LTCG)

(STCG if property was not held long term prior to sale)

Question 9

Inventory Valuations and Flow Methods

Answer 9

Rising prices LIFO (new inventory)

• diminishes taxable income and reduces taxes
• tax liability lower
• purchase price increasing/ selling price constant
• net business income lower
• inventory cost understated

FIFO

• increased earnings
• greater tax liability
• Current Cost inventory
• Net business income higher

change can effect value of stock

Can also use Specific Identification (lots)

Question 10

Net Operating Losses

Answer 10

Excess of deductible expenses over gross income

Not allowed for S Corp or partnerships

Carry back 2 years
Carry forward 20 years