Slide 1ACCOUNTING PERIODS AND METHODSAccounting PeriodsRequired Payments and Fiscal YearsChanges in the Accounting Period (1 of 2)Changes in the Accounting Period (2 of 2)Returns for Periods of Less than 12 Months (1 of 2)Returns for Periods of Less than 12 Months (2 of 2)Overall Accounting MethodsCash Receipts and Disbursements Method (1 of 2)Cash Receipts and Disbursements Method (2 of 2)Accrual Method (1 of 2)Accrual Method (2 of 2)Hybrid MethodInventories (1 of 2)Inventories (2 of 2)Special Accounting MethodsLong-Term ContractsLong-Term Contracts Completed Contract MethodLong-Term Contracts Percentage of Completion MethodInstallment Sales Method (1 of 2)Installment Sales Method (2 of 2)Deferred Payment SalesImputed InterestChange in Accounting Methods (1 of 2)Change in Accounting Methods (2 of 2)Tax Planning ConsiderationsCompliance & Procedural ConsiderationsSlide 2911-1©2007 Prentice Hall, Inc.©2007 Prentice Hall, Inc.11-2ACCOUNTING PERIODS ACCOUNTING PERIODS AND METHODSAND METHODSAccounting periodsOverall accounting methodsInventoriesSpecial accounting methodsImputed interestChange in accounting methodsTax planning considerationsCompliance & procedural considerations©2007 Prentice Hall, Inc.11-3Accounting PeriodsAccounting PeriodsFiscal year is any 12-month period other than calendar yearPartnerships, S corps, and PSCsGenerally must have same tax year as majority owners (>50% ownership)Required payments and fiscal yearsChanges in the accounting periodReturns for periods of < 12 months©2007 Prentice Hall, Inc.11-4Required Payments and Fiscal YearsC corporations, other than PSCs, can choose any fiscal yearPartnerships, S corps, and PSCs can choose a fiscal year if deferral is 3 months or less©2007 Prentice Hall, Inc.11-5Changes in the Accounting Period(1 of 2)Generally need IRS approval to change accounting periodMust establish substantial business purpose to change accounting period©2007 Prentice Hall, Inc.11-6Changes in the Accounting Period(2 of 2)IRS approval not necessaryConformity of newly married spousesChange to 52/53 week year ending in same calendar month as prior tax yearCertain corporations which have not changed accounting periods within 10 years©2007 Prentice Hall, Inc.11-7Returns for Periods ofLess than 12 Months (1 of 2)No annualization of income requiredTaxpayer’s first or final returnAnnualization requiredChange from one accounting method to another©2007 Prentice Hall, Inc.11-8Returns for Periods ofLess than 12 Months (2 of 2)Annualization procedure1. Determine modified taxable incomeMust use itemized deductionsNo personal and dependency exemptions2. Multiply modified taxable income by (12 ÷ # of months in short period)3. Compute tax on resulting amount4. Multiply resulting tax by (# of months in short period ÷ 12©2007 Prentice Hall, Inc.11-9Overall Accounting Overall Accounting MethodsMethodsOverall accounting method used in one trade or business not needed to be used in a second trade or businessCash receipts and disbursements methodAccrual methodHybrid method©2007 Prentice Hall, Inc.11-10Cash Receipts and Disbursements Method (1 of 2)Report income for the tax year in which payments are receivedExpenses deducted in the year paidMust capitalize fixed assets and recover through depreciation or amortization©2007 Prentice Hall, Inc.11-11Cash Receipts and Disbursements Method (2 of 2)Most individuals and many service businesses use the cash methodCannot use cash method in a business for sales and cost of goods sold©2007 Prentice Hall, Inc.11-12Accrual Method(1 of 2)Report income under all-events test and economic performance testAll events test Taxpayer’s right to receive income can be determined with reasonable accuracyEconomic performance testProperty or services actually rendered by the other party©2007 Prentice Hall, Inc.11-13Accrual Method(2 of 2)Deduction is met when liability established and amount of expense can be determined with reasonable accuracy©2007 Prentice Hall, Inc.11-14Hybrid MethodUse accrual method for sales and purchases, but may use cash method for other income and expensesSmall business exceptionBusinesses with inventory whose annual gross receipts for 3 prior years ≤ $1M may use cash method for sales and accrual method cash method for cost of goods sold©2007 Prentice Hall, Inc.11-15InventoriesInventories(1 of 2)(1 of 2)Lower cost or marketLIFOMust also use LIFO for financial accountingCannot use lower cost or market©2007 Prentice Hall, Inc.11-16InventoriesInventories(2 of 2)(2 of 2)Uniform capitalization rules (UNICAP)Required for taxpayers whose average gross receipts for 3 prior years >$10MMust capitalize some period costsCycle inventory valuationCongress specifically permits method©2007 Prentice Hall, Inc.11-17Special Accounting Special Accounting MethodsMethodsLong-term contractsInstallment sales methodDeferred payment sales©2007 Prentice Hall, Inc.11-18Long-Term ContractsFor items that are not completed in same tax year in which they beginFor manufacture unique item not normally carried in finished goods inventoryServices not eligible for long-term contract methods©2007 Prentice Hall, Inc.11-19Long-Term ContractsCompleted Contract MethodIncome and expenses reported in year contract completedOnly available in two circumstancesSmall companies w/avg gross receipts for prior 3 years is ≤ $10M for contracts expected to take < 2 years to complete ANDHome construction©2007 Prentice Hall, Inc.11-20Long-Term ContractsPercentage of Completion MethodIncome and expenses reported in each year of contract based on estimated percentage of completed workModified percentage of completionIncome deferred until 10% of estimated cost accumulated©2007 Prentice Hall, Inc.11-21Installment Sales Method(1 of 2)Any disposition of property where at least one payment received after close of tax year of dispositionNot applicable for sale ofInventoryMarketable securitiesSpecial rules for related parties sales©2007 Prentice Hall, Inc.11-22Installment Sales Method(2 of 2)Computation under §4531. Compute gross profit from sale2. Determine contract price3. Compute gross profit percentageGross Profit ÷ Contract Price4. Compute gain to be reportedProceeds X Gross Profit PercentageDepreciation recapture
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