Income Tax Accounting-Exam Outline

Income Tax Accounting-Exam Outline - Income Tax Accounting...

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Unformatted text preview: Income Tax Accounting Outline I. Introduction & Review II. Cash Method III. Accrual Method Income IV. Accrual Method Deductions V. Special Rules Relating to Deductions VI. Specialized Methods of Accounting VII. Inventories VIII. Change of Accounting Method and Accounting Periods IX. Section 199 I. Introduction & Review A. Introduction What is a Method of Accounting? Any regularized practice or procedure for determining when you have an item of income or expense (as interpreted under 446 & RR 90-38)- Section 446(a) sets forth the general rule that taxable income shall be computed under the MOA on the basis of which the TP regularly computes his income in keeping his books.- Section 446(b) provides that if no method of accounting has been regularly used, or if the method does not clearly reflect income, then the TP must use a method that, in the IRSs opinion, does clearly reflect income.- TR 1.446-1(a) states that the term MOA includes not only the overall MOA of the taxpayer but also the accounting treatment of any item .- Questions to Ask : Is this a practice that permanently changes my receipt of income? Is it a practice that changes the timing of receipt of income? (1) Material Items : the term item is used to indicate any recurring incidence of income or expense. For example, real estate taxes, annual fees for state truck licenses, employee vacation pay, etc. (a) If similar articles differ in some way that would affect their accounting treatment, they are probably different items. For example, unit-price contracts and lump- sum contracts are different items for accounting purposes, whereas 1994 real estate taxes and 1995 real estate taxes are not different items. (b) Prevailing View: occurrences of income and deduction items are different items if they differ in some way that is relevant to the tax treatment of the item. (2) Materiality : TR 1.446-1T(e)(2)(ii)(a) provides that a material item is any item that concerns the timing of income or deductions.- IRS has asserted that an item concerns timing, and is therefore considered a MOA, if the practice does not permanently affect the taxpayers lifetime income, but does or could change the taxable year in which income is reported. R.Proc. 2002-18.- If a change leaves a taxpayers lifetime taxable income constant but affects when it is recognized, the change concerns an item which involves the proper time for the inclusion of [an] item in income or the taking of a deduction within the meaning of TR 1.446-1(e)(2)(ii)(a).- On the other hand, if a change affects the taxpayers income permanently, i.e., affects the taxpayers lifetime taxable income, it is not a change in accounting method. (e.g., correcting a mislabeling of dividends from a corp as salary to a shareholder, or of nondeductible personal expenses as deductible business expenses, is not a change in MOA)....
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Income Tax Accounting-Exam Outline - Income Tax Accounting...

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