1. ©2008 Prentice Hall, Inc.

2. ACCOUNTING PERIODS AND METHODS
Overall accounting methods
Inventories
Special accounting methods
Imputed interest
Change in accounting methods
Tax planning considerations
Compliance & procedural considerations
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

7. Returns for Periods of Less than 12 Months (1 of 2)
No annualization of income required
Taxpayer’s first or final return
Annualization required
Change from one accounting period to another
©2008 Prentice Hall, Inc.

8. Returns for Periods of Less than 12 Months (2 of 2)
Annualization procedure
Determine modified taxable income
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
©2008 Prentice Hall, Inc.

9. 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
©2008 Prentice Hall, Inc.

10. Cash Receipts and Disbursements Method (1 of 2)
Report income for the tax year in which payments are received
Expenses deducted in the year paid
Must capitalize fixed assets and recover through depreciation or amortization
©2008 Prentice Hall, Inc.

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 for sales and cost of goods sold
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

13. Accrual Method (2 of 2)
Deduction is met when liability established and amount of expense can be determined with reasonable accuracy
©2008 Prentice Hall, Inc.

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 ≤ $1M may use cash method for sales and accrual method cash method for cost of goods sold
©2008 Prentice Hall, Inc.

15. Inventories (1 of 2) Lower cost or market LIFO
Must also use LIFO for financial accounting
Cannot use lower cost or market
©2008 Prentice Hall, Inc.

16. Inventories (2 of 2) Uniform capitalization rules (UNICAP)
Required for taxpayers whose average gross receipts for 3 prior years >$10M
Must capitalize some period costs
Cycle inventory valuation
Congress specifically permits method
Inventory counted following a schedule
©2008 Prentice Hall, Inc.

17. Special Accounting Methods
Long-term contracts
Installment sales method
Deferred payment sales
©2008 Prentice Hall, Inc.

18. Long-Term Contracts
For items that are not completed in same tax year in which they begin
For manufacture unique item not normally carried in finished goods inventory
Services not eligible for long-term contract methods
©2008 Prentice Hall, Inc.

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 ≤ $10M for contracts expected to take < 2 years to complete AND
Home construction
©2008 Prentice Hall, Inc.

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
©2008 Prentice Hall, Inc.

21. Installment Sales Method (1 of 2)
Any disposition of property where at least one payment received after close of tax year of disposition
Not applicable for sale of
Inventory
Marketable securities
Special rules for related parties sales
©2008 Prentice Hall, Inc.

22. Installment Sales Method (2 of 2)
Computation under §453
Compute gross profit from sale
Determine contract price
Compute gross profit percentage
Gross Profit ÷ Contract Price
Compute gain to be reported
Proceeds X Gross Profit Percentage
Depreciation recapture recognized in year of sale
©2008 Prentice Hall, Inc.

23. 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
©2008 Prentice Hall, Inc.

24. Imputed Interest Imputed interest computation Accrual of interest
Generally must be at least 100% of applicable federal rate
Accrual of interest
Generally reported as it accrues
Several major exceptions
Special rules for gift, shareholder, and other tax avoidance loans
©2008 Prentice Hall, Inc.

25. 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 cash and accrual methods
©2008 Prentice Hall, Inc.

26. 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
©2008 Prentice Hall, Inc.

27. 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
©2008 Prentice Hall, Inc.

28. Compliance & Procedural Considerations
Installment Sales reported on Form 6252
Procedures for changing to LIFO
©2008 Prentice Hall, Inc.

29. ©2008 Prentice Hall, Inc.