terms 6 & 7 - ACC 307 FEDERAL TAXATION KEY TERMS...

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ACC 307 FEDERAL TAXATION KEY TERMS FOR CHAPTERS 6 AND 7 Chapter 6 Accounting method The method under which income and expenses are determined for tax purposes. Major accounting methods are the cash basis and the accrual basis. Special methods are available for the reporting of gain on installment sales, recognition of income on construction projects (the completed contract and percentage of completion methods), and the valuation of inventories (last-in, first-out and first-in, first-out). §§ 446474. See also accrual method, cash receipts method, completed contract method, percentage of completion method , etc. Deductions for adjusted gross income See adjusted gross income . Deductions from adjusted gross income See itemized deductions . Hobby loss A nondeductible loss arising from a personal hobby as contrasted with an activity engaged in for profit. Generally, the law provides a rebuttable presumption that an activity is engaged in for profit if profits are earned during any three or more years during a five-year period. § 183. See also vacation home . Ordinary and necessary See necessary and ordinary . Reasonablenes s The Code includes a reasonableness requirement with respect to the deduction of salaries and other compensation for services. What constitutes reasonableness is a question of fact. If an expense is unreasonable, the amount that is classified as unreasonable is not allowed as a deduction. The question of reasonableness generally arises with respect to closely held corporations where there is no separation of ownership and management. § 162(a)(1). Related-party
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terms 6 & 7 - ACC 307 FEDERAL TAXATION KEY TERMS...

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