ACCT 421A: CORPORATE TAX : Chapter Sixteen
How are farmers treated differently from other producers in regard to tax accounting?
Since farmers are usually allowed to use the cash method of accounting, the UNICAP rules do not apply to farmers, except in the case of plants with a reproduction period of more than two years. The farmer can elect to use the farm price method of the unit-livestock-price-method.
A farmer may also elect to average the income from farming as if it was earned over the three preceding years. Farmers are also granted special treatment in regard to the year income must be reported following a natural disaster or drought.
In December 2011, Nell, a cash basis taxpayer, paid insurance premiums of $12,000 on rental property for the period February 1, 2012 through January 31, 2013. How much of the premiums can Nell deduct in 2011?
None of the insurance premiums paid of $12,000 can be deducted in 2011. The prepayment period extends beyond the tax year following the year of payment and therefore must be capitalized. 7.
In 2011, the taxpayer became ineligible to use the cash method of accounting. At the beginning of the year, accounts receivable totaled $240,000, accounts payable for merchandise totaled $80,000 and the inventory on hand totaled $520,000. What is the amount of the adjustment due to the change in accounting method? The adjustment due to the change in accounting method is $480,000 ($240,000 - $80,000 + $320,000). Under the cash method, the accounts payable have not been included in income, the accounts payable have not been deducted, and the inventory has been deducted.
Compare the cash basis and accrual basis of accounting as applied to the following:
a) Fixed assets
Fixed assets are accounted for in the same manner by both cash and accrual basis taxpayers. They are capitalized and depreciated over their depreciable lives.
b) Prepaid expenses
Under the one-year rule, both cash and accrual basis taxpayers are permitted to deduct in the yeat of payment items that will be used up or expire within the tax year following the year of payment. Items with benefits that extend beyond the end of the tax year following the year if oayment must be capitalized and amortized by both the cash and accrual basis taxpayer.
c) Prepaid income for services
The cash basis taxpayer must include all prepaid income in the year it is actually or constructively received. The accrual basis taxpayer spreads the prepaid income over the year of receipts and the following year.
d) A note received for services performed if the market value and face amount of note differ.
A cash basis taxpayer must include the fair market value of the note in gross income. An accrual basis taxpayer would include the face amount of the note, the amount that he/she has a right ot receive. The cash basis taxpayer subsequently would include in gross income any amounts that are received in excess of the fair market value of the note on the date of the receipt. DISCUSSION QUESTIONS
Kay, who is not a dealer, sold an apartment house to Polly during 2011. The closing statement fir the sale as follows:
Total selling price
Polly’s share of property taxes (6 months) paid by Kay
Kay’s 8% mortgage assumed by Polly
Polly’s refundable binder (“earnest money) paid in 2010
Polly’s 8% installment note given to Kay
Kay’s real estate commissions and attorneys fees
Cash paid to Kay at closing
Cash due from Polly = $9,000 + $ 7,500 expenses
$ 16,500 a)
1. Total Gain = [$160,000 (selling price) - $70,000(basis)-$7,500(selling expenses)
Contact Price = $160,000 (selling price)- $55,000 (mortgage issued)
Collections in the year of sale
Cash paid at closing
Earnest money paid in 2010...
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