2011 Comp Topics IM Ch13 - 227 Chapter 13 Tax Accounting...

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©2010 CCH. All Rights Reserved. Chapter 13227Chapter 13Tax AccountingSUMMARY OF CHAPTER An understanding of tax accounting concepts is vital to any taxpayer, whether the taxpayer is an individual, a partnership, a corporation, or a trust or estate. Many of the concepts are familiar from financial accounting, but there are many details unique to taxation. Income tax accounting is concerned with the reporting of financial data to satisfy the requirements of the Internal Revenue Code, the Regulations that interpret the Code, rulings by the IRS that further interpret the Code and Regulations, and the decisions of the courts on litigated issues. Taxable Income and Tax Liability for Various Entities ¶13,001 Recapitulation of Taxable Income and Tax Liability This section features general outlines of the computation of taxable income and the computation of net tax (or net refund) due for various entities. Through this discussion, the student can see that many of the concepts learned in the first 11 chapters apply to all entities. Accounting Periods ¶13,007 The Tax Year “Tax year” means the calendar year or the fiscal year on the basis of which the taxable income is computed. The tax year may not exceed 12 calendar months, except where a 52-53-week tax year is adopted. The term “calendar year” means a period of 12 months ending on December 31. A “fiscal year” is defined as a period of 12 months ending on the last day of any month other than December. ¶13,015 Election of the Tax Year A new taxpayer may adopt any tax year without obtaining prior approval of the IRS in the first year. Sole proprietors must use the same period for business tax-reporting purposes that they use for their personal books. Except for partnerships that qualify under the business purpose exception, a partnership must use the same tax year as that of its partners who have an aggregate interest of greater than 50 percent in the partnership profits and capital. Newly organized corporations have the unrestricted right to select their annual accounting period. S corporations are required to have either a tax year ending on December 31 or any other tax year for which a legitimate business purpose is established. Estates may adopt any tax year without obtaining prior approval. Trusts, other than charitable and tax-exempt trusts, must be on the calendar year. Under certain conditions, farmers are now permitted to use a three-year income averaging for farm income. Change of Accounting Periods ¶13,101 IRS Permission or Consent If a taxpayer wishes to change the annual accounting period and adopt a new tax year, with certain exceptions, prior approval must be obtained from the IRS before using the new period for tax purposes. To prevent substantial distortion of income that may result from a change in tax period, an agreement between the taxpayer and the IRS is required. If approval is granted, the taxpayer must file an income tax return for the short period.

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