Chapter 6 Taxable Income from Business Operations

Accrual Method of Accounting  Under the accrual method, report income when the right to the income and the amount of the income can be determined with reasonable accuracy. Is usually triggered by a transaction.  Called the Realization Principle:  Recall from ACCT 5301 that this can lead to abusive behavior for financial reporting purposes—there is a tax cost associated with accelerating revenue.  This can be a very significant issue  See Shea Homes v. Commissioner ( idUSL2N0LH24C ) idUSL2N0LH24C

Deduction Of Expenses Under Accrual Method Of Accounting  MATCH expenses against revenues. Deduct when ALL EVENTS have occurred that determine the existence of the liability and the amount of the liability can be determined with reasonable accuracy.  Important exception—allowance method for bad debts and warranties not allowed for tax purposes, regardless of taxpayer’s method of accounting.