412 Study Guide

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  • Topic: Taxation, Tax, Generally Accepted Accounting Principles
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  • Published : April 16, 2012
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CHAPTER 16

ACCOUNTING PERIODS AND METHODS

LECTURE NOTES

GENERAL OVERVIEW

1.Role of the Accountant. Accountants have particular expertise in advising clients in this area due to a broad understanding of the use of financial accounting methods (e.g., LIFO inventory and depreciation systems).

2.GAAP vs. Tax Accounting. The Commissioner of the IRS has very broad powers over accounting methods, and the Commissioner is not bound by generally accepted accounting principles. See Thor Power Tool Co. v. Comm., 79-1 USTC ¶ 9139, 43 AFTR2d 79-362, 99 S.Ct. 773 (USSC, 1979).

3.The argument that the taxpayer’s accounting method should be accepted because it is in accordance with GAAP can only be persuasive when the IRS has not issued a Regulation on the matter and the taxpayer’s method does not violate any statutory provision (e.g., the economic performance requirement).

ACCOUNTING PERIODS

4.Tax Fiscal Year. A business will often use a tax fiscal year that coincides with its natural business year. This enables the business to better match revenues and expenses. For example, a retailer with a fiscal year ending January 31st can process after-Christmas returns and can hold clearance sales before measuring income for the year.

a.Partnerships. Partnership tax years are generally determined by the tax year of its partners.

(1)Majority interest partners. The partnership tax year generally must be the same as the tax year of the majority interest partners. The majority interest partners are the partners who own a greater than 50 percent interest in the partnership capital and profits. (2)Principal partners. If the majority interest partners do not have the same tax year, the partnership must adopt the same tax year as its principal partners. A principal partner is a partner with a 5 percent or more interest in the partnership capital or profits.

(3)Least aggregate deferral method. If the principal partners do not all have the same tax year and no majority of partners have the same tax year, the partnership must use a year which results in the least aggregate deferral of income.

(a)The different tax years of the partners are tested to determine which produces the least aggregate deferral.

(b)This is calculated by multiplying the combined percentages of the principal partners with the same tax year by the months of deferral for the test year.

(c)Once this is done for each set of principal partners with the same tax year, the resulting products are summed to produce the aggregate deferral.

(d)After calculating the aggregate deferral for each of the test years, the test year with the smallest summation (the least aggregate deferral) is the tax year for the partnership.

(4)Election of impermissible year. An otherwise impermissible year may be elected under any of the following conditions:

(a)A business purpose for the year can be demonstrated.

(b)The entity’s tax year results in a deferral of not more than three months’ income, and the entity agrees to make required tax payments.

(c)The entity retains the same tax year as was used for the fiscal year ending in 1987, provided the entity agrees to make required tax payments.

b.S corporations. S corporations generally must use a calendar year.

(1)Election of impermissible year. An otherwise impermissible year may be elected under the same conditions available for the partnership (above).

2) Enhanced payments = posting a bond. When the partnership or S corporation uses a fiscal year and makes the enhanced payments, this is equivalent to posting a bond that will remain with the government until the entity goes out of business.

3) The enhanced payments...
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