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Unformatted text preview: Individual Tax Accounting & Planning – 2011 edition Chapter 4 Generally, all amounts received by a taxpayer are considered income, unless specifically identified as excludable by the IRC. Taxable year is most often the calendar year. Accounting Methods for Tax Reporting : a) Cash Basis : must be used by individuals unless the individual has a sole proprietorship, partnership or SCorp that engages in the sale of inventory, then only inventory transactions are on the accrual basis; Revenue is recorded upon actual or constructive receipt b) Accrual Basis : C corporations must use the accrual basis; however, unlike in financial accounting, income is recognized even when a likely refund might result; however, if disputed amounts are subject to a lawsuit, the disputed amount is not income unless payment had been made. Prepaid income is taxed in the year of receipt : the form of receipt can be cash, property or services, unless, however, the prepaid income was for goods or services: Goods: the income recognition should always follow the recognition of Cost of Goods Sold and financial accounting records Services: for accrual basis taxpayers, amounts received can be deferred if services are to be rendered after the tax year ends, however, the deferred amounts must be recognized in the tax year immediately following the year of receipt regardless of when earned. 1 Individual Tax Accounting & Planning – 2011 edition Chapter 4 Income must be recognized by the owner of the property from which the income was generated . Lucas v. Earl, “fruit and tree” metaphor. There are a few exceptions to this rule: 1. Partnerships and SCorps: Income earned by partnerships and SCorps “passes-through” to the underlying owners whether or not an equivalent cash amount is given. 2. Community Property States...
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- Spring '10
- individual tax accounting