Tax Test 3 Review

Tax Test 3 Review - Tax Test 3 Review Chapters 6-11 Chapter...

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Tax Test 3 Review Chapters 6-11 Chapter 6 The Internal Revenue code allows a deduction for “all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. The choice of a calendar or fiscal year is usually dictated by the firm’s operating cycle; firms want to close their books and calculate their profit at the end of a natural cycle of business activity. Section 482 of the IRC states that in the case of two or more businesses under common ownership or control, the IRS may “distribute, apportion, or allocate gross income, deduction, credits, or allowances” among the businesses to clearly reflect the income of each. Political contributions are not deductible. Congress allows firms to deduct only 50% of most meal and entertainment expenses. Firms cannot deduct illegal bribes or kickbacks or fines or penalties paid to any government for a violation of law. Firms that earn tax-exempt interest record it as revenue on their books but do not recognize it as gross income for tax purposes. The law provides a similar preference for the proceeds of life insurance policies: the proceeds are excluded from the recipient’s gross income. A corollary to the tax-exempt status of municipal bond interest and key-person life insurance proceeds is that expenses related to these income items are nondeductible. A firm can’t deduct the interest paid on a debt if the borrowed funds were used to purchase or carry tax-exempt bonds. Nor can a firm deduct the annual premiums paid on key-person life insurance policies. For 2009, the deduction for income attributable to domestic production activities generally equals 6% of a firms net income derived from the sales of property “manufactured, produced, grown, or extracted” within the United States. Under the cash method of accounting, firms record expenses in the year the expense is paid, regardless of when the liability for the expense was incurred.
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Under the cash method of accounting, income is received when a person has unrestricted access to and control of the income, even if it is not in the person’s actual possession. Cash basis firms can accelerate a deduction by paying an expense before the year in which the expense contributes to the generation of revenues. Any business expenditure creating a benefit with a useful life extending substantially beyond the close of the year is not deductible but must be capitalized and amortized over its useful life If an expenditure results in a benefit with duration of 12 months or less and that benefit does not extend beyond the end of the taxable year following the year of the payment the expenditure is deductible in the year of the payment. If the expenditure results in a benefit with a duration of more than 12 months, it must be capitalized. Firms that sell merchandise to their customers must use the accrual method to account for
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Tax Test 3 Review - Tax Test 3 Review Chapters 6-11 Chapter...

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