13 chapter TAX ACCOUNTING
OBJECTIVES
After completing Chapter 13, you should be able to:
1. List what are permissible tax years.
2. Explain the requirements for changing a tax year.
3. Identify the available accounting methods.
4. Understand the rules for accounting method changes.
5. Account for the capitalization of inventory costs.
6. Describe long-term contract reporting.
7. Defi ne the installment method of accounting.
13–2 CCH FEDERAL TAXATION—COMPREHENSIVE TOPICS
OVERVIEW
The fi rst 12 chapters are presented primarily from the individual taxpayer’s point of view (including self-employed taxpayers). This chapter provides a general discussion of the previous material as it applies to other entities and provides a
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Thus, the Internal Revenue
Service has been provided with Code Sec. 482, under which it may reallocate items of income, deduction, credit, or allowance in order to prevent tax avoidance when two or more organizations are controlled by the same interest. Further, if the taxpayer’s method of accounting does not clearly refl ect income, Code Sec. 446 authorizes the IRS to require the use of a method that will do so. Additionally, the Supreme Court has indicated that the use of generally accepted accounting principles (GAAP), which apply to fi nancial accounting and are considered to be the “best” accounting practices, does not necessarily clearly refl ect income and does not shift the burden of proof to the IRS to show otherwise. Thor Power Tool Co., 79-1 USTC ¶9139, 439 U.S. 522 (1979).
Once the questions of what items are includible in gross income and what items are deductible in computing taxable income are answered, a second set of questions must be faced. These relate to when such qualifying items are to be utilized in that computation. In other words, in what tax year is an item of income actually to be included in gross income? In what tax year is a deduction to be subtracted from gross income?
The general answers to most of these “when” questions are furnished in terms of the method of accounting regularly employed by the taxpayer in his or her business and recordkeeping. That record, however, must “clearly refl ect income.” Various accounting
* What are the differences between the following components of taxable income? Provide at least one example of each.
income. In particular, the corporation has inquired whether the following benefits provided by the corporation to employees would be included in an employee’s taxable income:
The case it self provides a series of matters to be attends, these matters have to be address in accordance to the General Accepted Accounting Principles.
According to the IRC §61(a)(1), “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the
Chapter 5; IRC Secs. 101, 102, 103, & 108; All are excluded from gross income.
IRS.gov. (2014, 2 4). Retrieved 2 7, 2014, from Retirement Plans for Self Employed People: http://www.irs.gov/
1. Section 351 (which permits transfers to controlled corporations to be tax deferred) can be justified under the
Accounting Standards update No. 2016-17, Oct 2016; Interests Held through Related Parties That Are under Common Control, is an amendment to the Consolidations Analysis Update 2015-02. The purpose of this amendment is to provide guidance for consolidation to an entity that is the single decision maker of a variable interest entity (VIE). The Variable Interest entity(VIE) is a term reported by FASB to define an entity in which the controlling interest is held by an investor and is not based on most voting rights. The party that has ownership, contractual, or
2. Which two statements describe how taxes influence decisions made when filing a return for an individual taxpayer?
16 State wages, tips, etc. 17 State income tax 18 Local wages, tips, etc. 19 Local income
d Total number of exemptions claimed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Under 26 USC § 121, gains on the sale for married taxpayers filing jointly would be excluded up to $500,000 (or $250,000 each for married filing separately) given the residence was owned and occupied as a principal residence for two out of the last five years.
| 19 |LO 4 |Dependency exemption: exceptions to the citizenship or | |New | |
13. When the average gross receipts are computed, is the current tax year (2004) included in the computation to determine whether SK is eligible to use the cash method for 2004?
The information that I am currently learning right now in my tax class will help greatly as I