2010 Pearson Education Inc Publishing as Prentice Hall
© 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -1
ACCOUNTING PERIODS AND METHODS (1 of 2) ® Accounting periods ® Overall accounting methods ® Inventories ® Special accounting methods ® Imputed interest © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -2
ACCOUNTING PERIODS AND METHODS (2 of 2) ® Change in accounting methods ® Tax planning considerations ® Compliance & procedural considerations © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -3
Accounting Periods ® Fiscal year is any 12 -month period other than calendar year ® Partnerships, S corps, and PSCs Generally must have same tax year as majority owners (>50% ownership) ® Required payments and fiscal years ® Changes in the accounting period ® Returns for periods of < 12 months © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -4
Required Payments and Fiscal Years ®C corporations, other than PSCs, can choose any fiscal year ® Partnerships, S corps, and PSCs can choose a fiscal year if deferral is 3 months or less (§ 444 election) Required payments must be made by April 15 to offset advantage of deferral from § 444 election © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -5
Changes in the Accounting Period (1 of 2) ® Generally need IRS approval to change accounting period ® Must establish substantial business purpose to change accounting period © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -6
Changes in the Accounting Period (2 of 2) ® IRS approval not necessary Conformity of newly married spouses Change to 52/53 week year ending in same calendar month as prior tax year Certain corporations which have not changed accounting periods within 10 years © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -7
Returns for Periods of Less than 12 Months (1 of 2) ® No annualization of income required Taxpayer’s first or final return ® Annualization Change required from one accounting period to another © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -8
Returns for Periods of Less than 12 Months (2 of 2) ® Annualization procedure 1. Determine modified taxable income ® ® 2. 3. 4. Must use itemized deductions No personal and dependency exemptions Multiply modified taxable income by (12 ÷ # of months in short period) Compute tax on resulting amount Multiply resulting tax by (# of months in short period ÷ 12 11 -9 © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Overall Accounting Methods ® Overall accounting method used in one trade or business not needed to be used in a second trade or business ® Cash receipts and disbursements method ® Accrual method ® Hybrid method 11 -10 © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Cash Receipts and Disbursements Method (1 of 2) ® Report income for the tax year in which payments are received ® Generally deduct expenses in year paid Prepaid expense capitalized and amortized if benefits extend beyond tax year ® Must capitalize fixed assets and recover through depreciation or © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -11
Cash Receipts and Disbursements Method (2 of 2) ® Most individuals and many service businesses use the cash method ® Cannot use cash method in a business where inventory is material income producing factor Small business exception – see hybrid method © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -12
Accrual Method (1 of 2) ® Report income under all-events test and economic performance test All events test ¬Taxpayer’s right to receive income & amount determined w/reasonable accuracy Economic performance test ¬Property or services actually rendered by other party © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -13
Accrual Method (2 of 2) ® Deduction is met when liability established and amount of expense can be determined with reasonable accuracy © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -14
Hybrid Method ® Use accrual method for sales and purchases, but may use cash method for other income and expenses Small business exception ¬Businesses with inventory whose annual gross receipts for 3 prior years ≤ $1 M may use cash method for sales and accrual method cash method for cost of goods sold © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -15
Inventories (1 of 2) ® Use lower of cost or market ® If using LIFO for tax Must also use LIFO for financial accounting May use lower of cost or market © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -16
Inventories (2 of 2) ® Uniform capitalization rules (UNICAP) Required for taxpayers whose average gross receipts for 3 prior years >$10 M Must capitalize some period costs ® Cycle inventory valuation Congress specifically permits method Inventory counted following a schedule © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -17
Special Accounting Methods ® Long-term contracts ® Installment sales method ® Deferred payment sales © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -18
Long-Term Contracts In General ® For items that are not completed in same tax year in which they begin ® For manufacture of unique item not normally carried in finished goods inventory ® Services not eligible for long-term contract methods © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -19
Long-Term Contracts Completed Contract Method ® Income and expenses reported in year contract completed ® Only available in two circumstances Small companies w/avg gross receipts for prior 3 years is ≤ $10 M for contracts AND Construction contracts expected to take < 2 years, or home construction © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -20
Long-Term Contracts Percentage of Completion Method ® Income and expenses reported in each year of contract based on estimated percentage of completed work ® Modified percentage of completion Income deferred until 10% of estimated cost accumulated © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -21
Installment Sales Method (1 of 3) ® Any disposition of property where at least one payment received after close of tax year of disposition ® Elective provision ® Not applicable for sale of Inventory Marketable securities © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -22
Installment Sales Method (2 of 3) ® Disposition of installment obligations Gain = [selling price] – [adjusted basis of installment note] ¬Adjusted selling price = [face value] x [100% - gross profit percentage] © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -23
Installment Sales Method (3 of 3) ® Computation under § 453 Compute gross profit from sale 2. Determine contract price 3. Compute gross profit percentage Gross Profit ÷ Contract Price 4. Compute gain to be reported Proceeds X Gross Profit Percentage 1. ® Depreciation recapture recognized in year of sale © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -24
Deferred Payment Sales ® Installment method cannot be used when property sold at a loss ® Obligations with indeterminate market value E. g. , mineral interest sold for 10% of value of future production Value no lower than value of property sold less value of other property received © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -25
Imputed Interest ® Imputed interest computation Generally must be at least 100% of applicable federal rate ® Accrual of interest Generally ¬Several reported as it accrues major exceptions ® Special rules for gift, shareholder, and other tax avoidance loans © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -26
Change in Accounting Methods (1 of 2) ® Accounting period chosen by using for first year in which it is applicable IRS approval required to change methods May change to LIFO method without IRS approval ® Amount of change Due to timing of income and deduction recognition due to changes between © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -27
Change in Accounting Methods (2 of 2) ® Reporting the amount of the change The amount Change voluntary or involuntary Any specific statutory mandates ® Obtaining IRS consent © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -28
Tax Planning Considerations ® Accounting periods Consider year end and marginal tax rate in initial year ® Accounting methods ® Installment sales Consider marginal tax rate and amount of gain to decide whether or not to elect out of installment method © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -29
Compliance & Procedural Considerations ® Installment Sales reported on Form 6252 ® Procedures for changing to LIFO Advanced IRS permission required except for first year inventory carried Form 970 in 1 st year using LIFO © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -30
Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard. newmark@Ph. Duh. com © 2010 Pearson Education, Inc. Publishing as Prentice Hall 11 -31
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