AC256_Finley Joey_Gross Income Inclusions_Unit 3

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Running head: GROSS INCOME INCLUSIONS 1 Gross Income Inclusions Joey Finley Kaplan University Federal Tax AC256 Emil Koren June 07, 2011
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Gross Income Inclusions 1) Problem I:3-33 Larry’s Art Gallery sells oil paintings, lithographs, and bronzes to collectors and corporations. Customers often come to Larry looking for special pieces. In order to meet customer needs, Larry often accepts orders and then travels looking for the desired item, which he purchases and delivers to the customer. The pieces are expensive, and Larry requires customers to demonstrate their sincerity by providing deposits. If it turns out that the item costs more than expected, Larry contacts the buyer and asks for additional funds. If the item costs less than expected, Larry refunds the excess amount. Also, Larry sometimes returns amounts he received in advance because he is unable to find what the customer wants. What tax issues should Larry’s Art Gallery consider? An assumption in preparing the response to this problem presumes that customer orders are not sales, but rather requests for specific items where the availability and the price is unknown. a) Are the amounts Larry collects actually advance payments, or advance sales? i) Regardless of what they are called, the receipt of cash is income. There is an exception for accrual basis taxpayers when a contract is in place. Not so in this problem. b) Is the deposits taxable income on receipt? i) Yes, deposits are taxable for a cash basis taxpayer as well as an accrual basis taxpayer in the year in which received presuming Larry has full use of the cash received. It is still true even when the deposit amount may be returned. c) Are the returns of deposits actually negative income (deducted from income because they have already been reported)? i) Yes, that is true, although it would only be an issue if the deposit was received in year 1 and returned in year 2. d) If a deposit was reported last year and it represented 50% of the actual sale this year, how is inventory handled?
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i) Oddly enough, 100% of the cost of inventory will actually be matched with only 50% of the revenue in year 2. Needless to say, Larry probably keeps his accounting records on a different basis that than used for tax reporting. e) Are the costs associated with the acquisition of any item expensed or inventoried (i.e. travel)? i) All costs of securing inventory are part of the cost of inventory, and then cost of sales when sold. This presumes that the purpose of the expense is to secure a particular piece of inventory, and not a general shopping trip. f)
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This note was uploaded on 09/20/2011 for the course KAPLAN UNI MT 140 taught by Professor Thum during the Spring '10 term at Kaplan University.

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